Sweets Company of America, Inc. v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 11 July 1928
• Docket Number: Docket No. 6522,20193.
• Parties: SWEETS COMPANY OF AMERICA, INC. (A NEW YORK CORPORATION), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SWEETS COMPANY OF AMERICA, INC. (A VIRGINIA CORPORATION), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

12 B.T.A. 1285 (1928)

SWEETS COMPANY OF AMERICA, INC. (A NEW YORK CORPORATION), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

SWEETS COMPANY OF AMERICA, INC. (A VIRGINIA CORPORATION), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 6522, 20193.

Board of Tax Appeals.

Promulgated July 11, 1928.

Philip S. Peyser, Esq., and Felix H. Levy, Esq., for the petitioners.

J. Harry Byrne, Esq., for the respondent.

Each of these proceedings relates to a deficiency in income and profits tax for a period commencing January 1, and ending June 30, 1919, amounting to $5,814.12, all of which is in controversy. The notice of deficiency in Docket No. 6522 is directed to The Sweets Company of America, Inc. (New York corporation), and is dated July 17, 1925. In Docket No. 20193 the deficiency notice dated August 7, 1926, asserts a liability against the Sweets Company of America, Inc. (Virginia corporation), under section 280 of the Revenue Act of 1926, as transferee of the property of the New York corporation. The two proceedings were consolidated on motion and were heard together upon stipulation and various exhibits.

The petition in Docket No. 6522 contains allegations of errors of the Commissioner in substance as follows:

(a) In not accepting a single consolidated return for the full calendar year 1919;

(b) In determining that the petitioner should report its income for the calendar year 1919 in two fiscal periods ending June 30, 1919, and December 31, 1919, respectively;

(c) In failing to find that the end of petitioner's first fiscal period for 1919 was October 31, 1919, rather than June 30, 1919;

(d) In finding that the mere acquisition of 100 per cent of the stock of the Sweets Company of America, Inc. (New York corporation), by the Virginia corporation of the same name, made necessary the computation of the tax on the basis of two fiscal periods rather than a single calendar year (e) In failing to deduct the net loss for the six-month period ending December 31, 1919, from the income from the six months ending June 30, 1919.

The petition in Docket No. 20193 repeats the foregoing allegations, in substance, and contains the following alleged errors in addition:

(f) In determining that he (the Commissioner) had authority to overrule his prior decision that petitioner was entitled to file a single consolidated return for 1919;

(g) That on August 7, 1926, the date of the deficiency letter addressed to this petitioner, assessment was barred by the limitation provisions of the revenue acts;

(h) In prorating invested capital when computing the excess profits tax for the six-month period ending June 30, 1919.

FINDINGS OF FACT.

The petitioner in Docket No. 6522, the Sweets Company of America, Inc., is a New York corporation (hereinafter called the New York Sweets Co.), formerly having its principal office in New York City. The petitioner in Docket No. 20193 is the Sweets Company of America, Inc., a Virginia corporation (hereinafter called the Virginia Sweets Co.), and has its principal office in New York City.

Prior to 1904, there existed in New York City a partnership, trading under the name of Stern & Saalberg, which was engaged in manufacturing special kinds of candies and sweets. On December 30, 1903, a New York corporation of the same name was organized, and thereafter the partnership transferred all of its assets to the corporation in exchange for the entire capital stock, and the corporation continued the business formerly of the partnership. On December 7, 1917, the corporation duly changed its name to "The Sweets Company of America, Inc.," in accordance with the laws of the State of New York.

On April 5, 1918, the Lance Cough Drop Co., Inc., a New York corporation, was organized. Its entire capital stock was issued to Philip H. Liefert in exchange for certain property transferred to it by him. This corporation also manufactured candies and sweets. All of its capital stock thereafter was acquired by the New York Sweets Co. It is admitted that the New York Sweets Co. and the Lance Cough Drop Co. were affiliated during the period commencing January 1, 1919, and ending June 30, 1919.

On or about July 1, 1919, the Virginia Sweets Co. was organized for the purpose, among others, of acquiring the business and assets of the New York Sweets Co. and the Lance Cough Drop Co. It had an authorized capital stock of $5,000,000, consisting of 500,000 shares of par value of $10 each. On or about July 7, 1919, the Virginia Sweets Co. acquired all of the issued and outstanding capital stock of the New York Sweets Co., consisting of 4,000 shares of common, 6,000 shares of second preferred each of the par value of $100 per share, in exchange for 199,970 shares of $10 par value of its own capital stock, and $41,816 in cash. The Virginia Sweets Co. at about the same time sold 100,000 of its shares to brokers for $350,000 in cash.

On October 29, 1919, the Lance Cough Drop Co. was merged with the New York Sweets Co., and the name of the latter at the same time was changed from the Sweets Company of America, Inc., to the Lance Cough Drop Co., Inc., both in accordance with the laws of the State of New York.

Thereafter, and on October 31, 1919, the Lance Cough Drop Co., Inc. (formerly the Sweets Company of America, Inc., the New York Corporation), was merged into the Sweets Company of America, Inc., the Virginia corporation, by appropriate corporate action and in accordance with the laws of New York.

From the time of its organization until October 31, 1919, the Virginia Sweets Co. was not an operating company, but held the stock of the New York Sweets Co. From and after October 31, 1919, it carried on the business formerly of the New York Sweets Co. and the Lance Cough Drop Co.

Early in March, 1920, the Virginia Sweets Co., through its attorney, applied to the then Commissioner of Internal Revenue to ascertain the correct method of making the tax return of itself and the other two companies for the year 1919; and in response it received the following letter:

TREASURY DEPARTMENT Washington, March 19, 1920. Mr. MALCOLM SUMNER 20 Nassau Street, New York, N. Y.

SIR: On the facts stated in your brief of March 6, 1920, personally submitted March 8, 1920, you are advised that the companies which you represent, namely, The Sweets Company of America, Inc., (N. Y.) The Lance Cough Drop Company, Inc., and The Sweets Company of America, Inc., (Virginia) may, under article 634 of Regulations 45, file a consolidated tax return for the calendar year 1919.

The Bureau cannot at this time authorize a deduction of the loss sustained in the calendar year 1919 from the net profits of the taxpayer for the preceding taxable year.

You are advised that the taxpayer should file a copy of this letter with his taxable return for the year 1919, together with a copy of "Affiliated Corporations Questionnaire", Form 819, properly executed.

Respectfully GEO. NEWTON Acting Assistant to the Commissioner.

A single consolidated return for the calendar year 1919 was accordingly filed and a copy of the above letter was attached thereto.

Subsequently, in 1923, Commissioner of Internal Revenue Blair, who then was in office, wrote to the attorneys for the petitioners as follows:

TREASURY DEPARTMENT Washington, March 7, 1923. BALDWIN, HUTCHINS & TODD, 120 Broadway, New York, N. Y.

SIRS: Your letter of February 6, regarding the Sweets Company of America, has been before me and the contents have been given very careful consideration. You have asked that this case, insofar as the question of consolidation for 1919 is concerned, be res adjudicata and closed upon the basis of a ruling obtained before the return was filed.

I am inclined to agree with your proposition that it would be bad practice to continue to reopen cases, and such a course would be unjustifiable in many cases. This, however, does not apply to your case for the reason that it was not finally closed. The ruling had not been approved by this office and the audit of the return had never been undertaken. In view of these circumstances, it is believed that the Bureau should not be precluded from reconsidering the question of affiliation. If the situation were reversed and the taxpayer felt that the ruling was incorrect, it would not hesitate to ask for reconsideration and to carry an appeal to the highest authority. The Bureau observes a doctrine of equal rights for the taxpayer and for the Bureau in matters of similar character and it could not be fairly maintained that the Bureau's position in this case is improper or unjustifiable. It is, therefore, impossible to hold that the case was finally closed by the previous decision.

The Committee on Appeals and Review has considered the question on its merits and you will be further advised of the findings.

Respectfully (Signed) D. H. BLAIR, Commissioner.

Thereafter, the prior ruling was reversed and this petitioner was directed to file one return covering the period from January 1, to June 30, 1919, and another return for the period from July 1, 1919, to December 31, 1919. The deficiency results entirely from the reversal of the prior ruling. It arises from the fact that there was a profit in the first six months of the year and there were losses during the remaining six months which were not offset against the profits, in computing income for the first six months.

The consolidated invested capital, as adjusted, of the New York Sweets Co. and the Lance Cough Drop Co., during the time they were affiliated was $198,662.30. The Commissioner used one-half of this amount in computing the excess-profits credit for the period from January 1 to June 30, 1919. In the period from January 1 to June 30, 1919, the net income of the New York Sweets Co. was $24,567.07, and the net loss of the Lance Cough Drop Co. was $132.26, leaving the consolidated net income $24,434.81. In the period from July 1, to October 31,...