Taylor Securities, Inc. v. Commissioner of Internal Revenue

• Decision Date: 17 October 1939
• Docket Number: Docket No. 89499.
• Citation: 40 BTA 696
• Parties: TAYLOR SECURITIES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

40 B.T.A. 696 (1939)

TAYLOR SECURITIES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 89499.

Board of Tax Appeals.

Promulgated October 17, 1939.

Randolph E. Paul, Esq., and Charles McInnis, Esq., for the petitioner.

H. D. Thomas, Esq., for the respondent.

This proceeding involves the respondent's determination of the following deficiencies in income tax (including for the years 1930 through 1933 the 50 percent addition for accumulation of surplus to evade surtax on stockholders under section 104 of the Revenue Acts of 1928 and 1932), excess profits tax, surtax (for the years 1934 and 1935 on the undistributed adjusted net income as a personal holding company under section 351 of the Revenue Act of 1934), and penalties:

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                           Year       | Income tax |  Penalty  || Excess profits|  Penalty  ||   Surtax  | Penalty
                                      |            |           ||    its tax    |           ||           |
                ----------------------|------------|-----------||---------------|-----------||-----------|---------
                1930 _________________| $5,229.34  | $1,307.34 ||_______________|___________||___________|_________
                1931 _________________|  2,388.45  |    597.11 ||_______________|___________||___________|_________
                1932 _________________|  1,719.21  |    429.80 ||_______________|___________||___________|_________
                1933 _________________|  5,245.44  |  1,311.36 ||   $411.41     |  $102.85  ||___________|_________
                1934 _________________|    971.49  |    242.87 ||    353.27     |    88.32  || $1,695.69 |  $423.92
                1935 _________________|  2,713.22  |    678.31 ||    986.62     |   246.66  ||  4,649.40 | 1,162.35
                ---------------------------------------------------------------------------------------------------
                

Matters put in controversy by the pleadings are the correctness of the respondent's action (1) in not allowing any amount as a deduction for reasonable and necessary business expenses for any of the years, (2) in not offsetting losses sustained on sales of securities in the United States against gains on similar transactions in determining the amount of petitioner's taxable income from such transactions for all the years, (3) in not allowing as a deduction for the respective taxable years dividends received by the petitioner from corporations organized in the United States, (4) in determining the 25 percent penalty for all years because of failure to file returns, and (5) in determining that the petitioner was subject to excess profits tax for the years 1933 through 1935 and in determining that the petitioner was subject to surtax for 1934 and 1935. In an amended answer the respondent admits error in imposing for 1930 through 1933 the 50 percent addition for accumulation of surplus to evade surtax on stockholders. Certain other admissions of error which relate to the determined gains from the sale of stock were made in the amended answer and will be taken up hereinafter at the points where such gains are considered.

FINDINGS OF FACT.

The petitioner is a corporation, organized and existing under the laws of the Province of Quebec, with its principal office at No. 1119 St. Catherine Street, West, Montreal, Canada.

No returns having been filed by the petitioner for the years 1930 through 1935, the respondent, pursuant to the provisions of section 3176 of the Revised Statutes as amended, in March 1937 made a return for the petitioner for each of such taxable years with respect to income received from sources within the United States, using as a basis therefor a statement of the petitioner dated June 26, 1936. Of the returns thus made "Corporation Income Tax Return," form 1120, for each of the years 1930 through 1932, "Corporation Income And Excess-Profits Tax Return," form 1120, for each of the years 1933 through 1935, and "Return Of Personal Holding Company", form 1120H for 1935, were prepared on March 16, 1937, and "Return Of Personal Holding Company", form 1120H for 1934, was prepared on March 23, 1937. The following items and amounts were entered on the returns as income received by the petitioner from sources within the United States:

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                                         |    Gains from      |   Dividends   |          |
                                         | sale of securities | from domestic | Interest |  Total
                                         |                    |  corporations |          |
                -------------------------|--------------------|---------------|----------|----------
                1930 ____________________|       $3,829.82    |    $4,604.59  |__________| $8,434.41
                1931 ____________________|           38.40    |     3,813.95  |__________|  3,852.35
                1932 ____________________|____________________|     2,478.98  | $217.81  |  2,696.79
                1933 ____________________|        5,955.17    |     2,272.96  |__________|  8,228.13
                1934 ____________________|        4,425.38    |     2,610.00  |   30.00  |  7,065.38
                1935 ____________________|       16,165.00    |     3,515.75  |   51.74  | 19,732.49
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On none of the returns was any amount entered or allowed as a deduction.

Using the income as shown in the returns made by him, the respondent determined the deficiencies in controversy and on March 23, 1937, mailed the notice of deficiency to the petitioner at the address of its principal office. The taxable income shown in the notice of deficiency for the respective taxable years, as well as the detail with respect thereto, was the same as that shown in the respective returns prepared by the respondent. The notice of deficiency showed that the deficiencies were determined by computing income tax liability for each of the taxable years under section 13 of the respective applicable revenue acts; tax liability under section 104 of the Revenue Acts of 1928 and 1932 for the years 1930 through 1933; excess profits tax for 1933 under section 216 (a) of the National Industrial Recovery Act and for 1934 and 1935 under section 702 of the Revenue Act of 1934, and surtax liability for 1934 and 1935 under section 351 of the Revenue Act of 1934. In addition the deficiency notice showed the computation of a 25 percent penalty on each of the above taxes.

On June 16, 1937, the petitioner filed with the Board its petition from the respondent's determination. The petition was signed by Valentine B. Havens and Charles B. McInnis, as attorneys for the petitioner, and was verified by Sarah McGowan, as treasurer of the petitioner, before the United States Consul at Montreal. In due course the respondent filed his answer.

Thereafter there were prepared for petitioner, corporation income tax returns for 1930 through 1932, corporation income and excess profits tax returns for 1933 through 1935, and returns of personal holding company for 1934 and 1935. All the foregoing returns were verified on December 12, 1938, by Richard N. Taylor, Jr., as vice president, and Sarah McGowan as treasurer, before a notary public of Kings County, New York. The income and excess profits tax returns for 1934 and 1935 and the personal holding company returns for the same years contain statements that they were prepared by Valentine B. Havens, attorney for the petitioner, on the basis of information furnished him by it. Such returns were also sworn to by Havens on December 12, 1938, before the above mentioned notary public. Said returns for the years 1930 through 1935 were filed with the collector of internal revenue at Baltimore, Maryland, on December 13, 1938.

On October 20, 1938, Havens, as counsel for the petitioner, was notified that the instant proceeding was set for hearing before a division of the Board which would sit in New York City beginning December 5, 1938. On December 13, 1938, the proceeding came on for hearing, at which time Havens appeared as counsel for the petitioner and moved for a continuance to the next New York Circuit Calendar beginning in January 1939, stating that the petitioner would be handicapped without the testimony of its president, one Taylor, whom he represented as then being in Canada and unable to be present because of being incapacitated. The desired continuance was granted and the proceeding was heard on January 16, 1939. At that time Havens did not appear in behalf of the petitioner. The testimony of Taylor was not offered and no explanation was made as to the failure to submit it, nor was there anything said or done to indicate that the petitioner considered that it was under any handicap without it.

The total gains on sales of securities by petitioner within the United States which resulted in gains, the total losses on sales which resulted in losses, and the net gain or loss on sales of securities were as follows for the respective years:

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                                  Year            | Total gains | Total losses | Net gain or
                                                  |             |              |     loss
                ----------------------------------|-------------|--------------|------------
                1930 _____________________________| $10,732.86  |  $6,266.89   |  $4,465.97
                1931 _____________________________|     117.65  |   8,079.40   |  -7,961.75
                1932 _____________________________|     515.02  |   4,968.34   |  -4,453.32
                1933 _____________________________|   8,396.61  |  32,162.48   | -23,765.87
                1934 _____________________________|   3,136.42  |   5,612.94   |  -2,476.52
                1935 _____________________________|  10,132.51  |  16,576.73   |  -6,444.22
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Dividends received by petitioner from domestic corporations were as follows for the years indicated:

                    1930 __________________ $4,604.59
                    1931 __________________  3,813.95
                    1932 __________________

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