Theatre Concessions, Inc. v. Comm'r of Internal Revenue, Docket No. 55331.
| Citation | 29 T.C. 754 |
| Decision Date | 31 January 1958 |
| Docket Number | Docket No. 55331. |
| Parties | THEATRE CONCESSIONS, INC., A FLORIDA CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
William T. Rogers, Esq., for the petitioner.
Raymond Whiteaker, Esq., for the respondent.
X corporation which had 5 stockholders owned and operated 4 theaters in which it also operated the business of selling soft drinks, candy, popcorn, etc., known as a ‘concession’ business. X organized petitioner corporation and acquired all its stock for $2,000. Thereupon X and petitioner executed a lease agreement, whereby petitioner acquired the right to operate such concession business on the premises of X. Petitioner agreed to pay X a percentage of its gross revenue and also to pay X for its supplies and equipment a price equivalent to X's costs. Petitioner failed to establish by a preponderance of the evidence that a major purpose of the transaction was not to obtain the exemption referred to in section 15(c), I.R.C. 1939. Held, respondent did not err in denying petitioner, pursuant to such section the use of such exemption. Held, further, petitioner not prevented from computing its income under section 430(e)(1)(A) by reason of the provisions of sections 430(e)(2)(B)(i) and 445(g) (2)(A).
Respondent determined a deficiency in petitioner's income and excess profits tax for the taxable year January 4 to December 31, 1951, in the amount of $8,636.74. This deficiency results from respondent's determination that ‘pursuant to the provisions of sections 15(c) and 129 of the Internal Revenue Code, (petitioner is) not entitled to the benefit of the $25,000.00 exemption from surtax provided in section 15(b), or the $25,000.00 minimum excess profits credit provided in the last sentence of section 431, or the alternative amount provided in section 430(e)(1)(A) of the Internal Revenue Code.’ The entire amount of the deficiency is here in issue.
The parties have filed herein a partial stipulation of facts. We find the facts to be as stipulated.
Petitioner is a corporation organized under the laws of Florida, with its offices located in Lakeland, Florida, and its principal place of business in Tallahassee. It was incorporated on January 4, 1951. Its certificate of incorporation recites as a part of ‘(t)he general nature of the business to be transacted’ the following:
To operate theatre concessions, to buy, sell and deal in food products, confectioneries, soft drinks and other articles and products customarily dealt in by theatre concessions, and to carry on any trade or business incidental thereto or connected therewith; to take, acquire, purchase, hold, own, rent, lease, sell, exchange, mortgage, improve, cultivate, develop, and otherwise deal in and dispose of any and all property, real and personal, of every description, incidental to or capable of being used in connection with the aforesaid businesses, or any of them; * * *
Petitioner's authorized capital stock was $2,000, all of which was subscribed for and issued to Tallahassee Enterprises, Inc., a Florida corporation, which owned and operated 4 theaters in Tallahassee, and which had been engaged in business since at least 1936.
Under date of February 7, 1951, a lease agreement was executed by and between petitioner and Tallahassee Enterprises, Inc., which contained the following provisions:
THAT the Lessor does hereby demise and lease unto the Lessee the spaces and facilities now being used for the carrying on of the concession business by the Lessor in its theatres located in Tallahassee, Florida, namely, Florida, State, Ritz and Tallahassee Drive-In Theatres, from the 22nd day of February, 1951 for the term of five (5) years, unless sooner terminated by the terms of this agreement, said lease to be upon the terms and conditions hereinafter set out:—
(1) The Lessor covenants for the Lessee the quiet enjoyment of said term, and that if the said buildings shall be so injured by fire as to render them untenantable for the operation of the concession business, this lease shall be terminated.
(2) The Lessee covenants and agrees to use the space covered by this lease for no other business or purpose other than the carrying on of the concession business, such as has been carried on by the Lessor in the past, and that it will not assign this lease without the written permission from the Lessor, and will leave the premises in as good repair as they now are, ordinary wear and tear excepted, and that at the expiration of said term, it will deliver to Lessor, its successors or assigns, quiet and peaceful possession of the said premises, and that the Lessor may enter for default of ten (10) days in the payment of any installment of rent or for the breach of any covenant herein contained.
(3) The Lessee further covenants and agrees to keep accurate records of all concession sales in each of the theatres aforesaid and to pay to Lessor as rental on the space and equipment used in such business covered by this lease, on or before ten (10) days following the close of each month during the term of this lease, percentages of such gross receipts in the respective theatres, as follows:
+--------------------------------+
¦Florida Theatre ¦10%¦
+----------------------------+---¦
¦Ritz Theatre ¦10%¦
+----------------------------+---¦
¦State Theatre ¦10%¦
+----------------------------+---¦
¦Tallahassee Drive-in Theatre¦15%¦
+--------------------------------+
(4) At the close of business on February 21, 1951, an accurate inventory will be made of any and all merchandise and supplies on hand in the respective concession businesses, and the Lessee agrees to pay Lessor therefor a sum equal to its costs for such merchandise and supplies, the payment therefor to be made within 10 (10) days from the effective date of this lease.
(5) It is understood and agreed by and between the parties that the use of the space and equipment aforesaid will include the necessary lights, water and heat needed in connection with the operation of the business.
(6) This lease shall not be recorded without the consent of the Lessor, and shall be binding upon the parties hereto, and their successors and assigns.
The signatures on behalf of both parties to the lease were by the same individuals.
The officers and directors of petitioner are as follows: B. B. Garner, president; B. F. Hyde, vice president; F. L. Alig, treasurer; and Helen Forney, secretary. The officers and directors of Tallahassee Enterprises, Inc., are: B. B. Garner, president; G. W. Worm, treasurer; and Helen Forney, secretary. There were five stockholders of Tallahassee Enterprises, Inc.
On or shortly subsequent to February 7, 1951, petitioner began to conduct and carry on the same theater concession business at the theaters of Tallahassee Enterprises, Inc., as that carried on by the latter prior thereto, using the same space and equipment. There was no change in or expansion of the business.
The execution of the lease agreement by Tallahassee Enterprises, Inc., was authorized by its directors at a meeting recited to have been held on February 7, 1951. The pertinent part of the minutes of that meeting read as follows:
After considerable discussion, it was unanimously voted that it would be to the best interest of the corporation that the concession business be separated from the theatre business proper, and that the same be operated by the wholly owned subsidiary.
It was further unanimously voted that the officers of the corporation be, and they are hereby, authorized and empowered to enter into a lease agreement with Theatre Concessions, Inc. for the lease of the concession business and of the equipment now being used in connection therewith, said lease to cover the rental of the space now being used in connection with the carrying on of such concession business, the rental to be charged in this connection with the carrying on of such concession business, the rental to be charged in this connection to be not less than 10% of the gross receipts in the Florida, Ritz and State Theatres and not less than 15% of the gross receipts in the Tallahassee Drive-In Theatre, which said rentals were considered and deemed by the Directors to be fair and reasonable both from the standpoint of Tallahassee Enterprises, Inc. and from Theatre Concessions, Inc.
The right to engage in the concession business in the theaters of Tallahassee Enterprises, Inc., was a valuable property right.
The reasons given by the president of petitioner and Tallahassee Enterprises, Inc., for the formation of petitioner and the execution of the lease were as follows:
(1) To facilitate a possible sale of the theaters and of the concession business carried on therein as separate business properties; (2) to prevent theater managers from knowing the total theater profits and encouraging possible competition by talking about the large profits made by the theaters; (3) to discourage theater managers from asking for increases in salaries; and (4) to protect the assets represented by the theaters from possible judgments for damages arising from the sale of poisonous foodstuff.
Another reason for, and a major purpose of, the formation of petitioner, the execution of the lease agreement, and the transfers of property to petitioner pursuant thereto was to effect tax savings. Petitioner has failed to establish by the clear preponderance of the evidence that a major purpose of the transfers accomplished thereby was not to obtain the exemption from surtax provided in section 15(b), I.R.C. 1939.
Petitioner computed its excess profits tax for the taxable year under section 430(e)(1)(A) of the Internal Revenue Code of 1939. In the ‘COMPUTATION OF TAX’ set out in the statement attached to the statutory notice of deficiency, respondent computed petitioner's excess profits net income ‘under the provisions of section 433(a)(2)(A), I.R.C.’
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