Tupelo Garment Co. of Tupelo v. State Tax Commission

• Decision Date: 19 April 1937
• Docket Number: 32699
• Citation: 173 So. 656,178 Miss. 730
• Court: Mississippi Supreme Court
• Parties: TUPELO GARMENT CO. OF TUPELO, MISS., v. STATE TAX COMMISSION

173 So. 656

178 Miss. 730

TUPELO GARMENT CO. OF TUPELO, MISS., v. STATE TAX COMMISSION

No. 32699

Supreme Court of Mississippi

April 19, 1937

Division A

1 TAXATION.

Where manufacturing company constructed building at cost of $54,712.20, against which depreciation of $1,765.10 was charged, and sold building to partnership composed of four directors constituting majority of board of directors and two others for $23,000, in determining taxable income manufacturing company held entitled to deduct resulting loss as "loss sustained from disposition of capital asset," since manufacturing company was entirely divested of title to property (Laws 1934, chap. 120, secs. 3, 6, 8, subd. 4).

2 TAXATION.

Trust fund set aside by manufacturing company for purpose of enabling trustees to make loan to company's employees and for purpose of creating amity, good feeling, cooperation, and good will between company and employees held not deductible, in determining taxable income, as "ordinary and necessary expense," where company created trust just few days before it was bound to account to State Tax Commission for income, company reserved right to terminate trust at any time, and company required good security for loans (Laws 1934, chap. 120, secs. 3, 6, 8, subd. 1; sec. 36).

3. TAXATION.

Deduction made in determining taxable income is in fact an "exemption," and exemption must be strictly construed against exemptionist.

HON. V. J. STRICKER, Chancellor.

APPEAL from the chancery court of Hinds county HON. V. J. STRICKER, Chancellor.

Proceeding by the Tupelo Garment Company of Tupelo, Miss., against the State Tax Commission. From an adverse decree, the Tupelo Garment Company appeals. Affirmed in part, and reversed in part and remanded.

Affirmed in part; reversed in part and remanded.

F. G. Thomas, of Tupelo, for appellant.

Chapter 120, Laws of Mississippi of 1934, is the Act under which the income tax return in question was filed. The act was approved on March 14, 1934, and took effect as of January 1, 1934. Section 8 of the Act provides that "In computing the net income there shall be allowed as deductions: (1) all the ordinary and necessary expense paid or incurred during the taxable year in carrying on any, trade or business." And it; is by virtue of this section and the regulations thereon which are interpretative thereof, that the appellant claims allowance of the deduction of the $ 25,000, which was paid over to the trustees of Tupelo Garment Company Foundation.

Section 8 of the Act further provides that "In computing the net income there hall be allowed as deductions: (4) Losses sustained during the taxable year not compensated for by insurance or otherwise, if incurred in trade or business. Losses sustained from the disposition of capital assets employed in the conduct of the regular trade or business shall be determined by deducting from the cost (or value as of March 16, 1912, if acquired prior to that date) the depreciation sustained and the amount realized therefrom." And it is by virtue of this section and the regulations thereon which are interpretative thereof, that the appellant claims allowance for the deduction of $ 29,947.10 sustained in the disposition of its capital asset, its building and the lease site upon which the building is located.

The case of Forbes Lithograph Mfg. Co. v. White, Collector of Internal Revenue, 42 F.2d 287, decided by a federal district court of Massachusetts, in June, 1930, involves identically the same proposition that we are now considering, involves the construction of the same regulation which governs this transaction, that is, section 234 (a), subsection (1) of the Federal Income Tax Statute of 1921 and Article 562 of the regulations thereon, said section being identical with the State Income Tax Act of 1934, Section 8 (1), so far as affects the question in this case.

Sugarland Industries v. Comr., 15 B. T. A. 1265; Elgin National Watch Co. v. Comr., 17 B. T. A. 339; Hibbard v. Corer., 5 B. T. A. 464; Colton v. Colton, 127 U.S. 300; Holden v. Circleville L. & P. Co., 216 F. 490; Fox v. Fox, 95 N.E. 498; Orr v. Yates, 70 N.E. 731; Poinsett Mills v. Comr., 1 U. S. Board of Tax Appeals Reports, page 6.

We believe that every test required has been met in the establishment, creation, actual operation and in benefits to the corporation of the Tupelo Garment Company Foundation. The fund has a separate and distinct entity from the appellant and, therefore, has a separate taxable entity; the creation thereof was by an instrument of trust which clearly and unmistakably defines the property which was settled by the trust, with clear and unmistakable language as to the benefactors thereunder, and under the practical operations of the trust fund we have shown that the purposes the creation have been carried out and furthermore that the desired results have been achieved.

There is nothing in the record which in any wise justifies any assertion that the property did not sell for its reasonable market value, and certainly the mere fact that the property sold for $ 23,000, when the cost on the books of the company carried the property at a value of $ 52,947.10 is of no evidentiary value. However, the fact that the stockholder's of the appellant have since the date of the sale of the property approved and acquiesced in the sale is strong evidenciary value that the sale price of $ 23,000 is reasonable and adequate and that the sale was made for good business reasons and was conducive to the best management and policies of the appellant. The impelling motive of the appellant in selling this real estate in order to take the real estate off of its books and to make the corporation more liquid remains by the record unchallenged. There is no evidence, proof or charge that there was any fraud in connection with the sale and as the record shows the entire transaction was strictly a bona fide one. Therefore, under the state of facts, should not the loss have been allowed as a proper item of deduction? We think unquestionably that it should and the right of the appellant to the deduction is amply sustained by the rules and regulations construing the section of the act allowing such deductions and sustained by the overwhelming weight of judicial interpretations regarding such right.

A taxpayer is not bound to fashion his own affairs in such a way as to create a greater tax liability.

Helvering v. Gregory, 69 F.2d 909.

The question of the control which the transferee has over the transferor is of no concern where the sale is a bona fide one, made for cash, but even conceding that the element of control is involved, (in this case not 80% but a mere 21% of ownership) we find cases sustaining our position where the control was absolute or practically so.

Edwards Securities Corp. v. Comr., 30 B. T. A. 918; Fruit Belt Tel Co. Case, 22 B. T. A. 440; David Stewart Case, 17 B. T. A. 604; Budd v. Corer., 43 F.2d 509; Dalton v. Bowers, 287 U.S. 404; Burnett v. Clark, 287 U.S. 410; Jones v. Comr., 71 F.2d 214; Elridge v. Corer., 30 B. T. A. 1322.

J. A. Lauderdale, Assistant Attorney-General, for appellee.

Under the facts in this case the Tupelo Garment Company, appellant, was not entitled to deduct from its gross income for its fiscal year beginning July 1, 1933, and ending June 30, 1934, the sum of $ 29,947.10 as a loss sustained from the disposition of capital assets employed in the conduct of the regular business of said company.

Unless appellant's claim for a deduction is clearly within the statute, then such claim should be disallowed.

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 78 L.Ed. 1348; Chas. Ilfield Co. v. Hernandez, 292 U.S. 69, 78 L.Ed. 1127; Helvering v. Inter-Mountain Life Ins. Jackson Fertilizer Co. Co., 294 U.S. 686, 79 L.Ed. 1227 v. Stone, 173 Miss. 183.

The contention of the State Tax Commission is that the pretended sale of the property in question by the Tupelo Garment Company to the Tupelo Realty Company was not, in fact, a sale but a mere subterfuge in the guise of valid transactions for the purpose of evading the income tax due by the appellant, and we think that the statement of fact is amply sufficient to sustain this contention.

Helvering v. Gregory, 69 F.2d 809; Wiggins v. Comr., 46 F.2d 743.

Under the facts in this case said corporation was not entitled to deduct from its gross income the sum of $ 25,000 paid by it to the Tupelo Garment Company Foundation.

It is my contention that this fund is delivered by the corporation to the trustees of the Foundation for the purpose of investment, and that the company may take its principal and income therefrom at any time it sees fit. This is clearly an investment and the fact that the title is in the trustees during the time the principal is earning income for the corporation would make no difference.

Appellant claims that this $ 25,000 should be deducted from its net income because it is "an ordinary and necessary expense." It is clearly shown by the facts in thin record that it was neither ordinary nor necessary, and it must be remembered that these terms are construed most strictly against the taxpayer.

In the case at bar it is shown that appellant operates in four counties and in five municipalities. Neither the population of the municipalities nor the counties is shown. What other employers are doing is not shown. The record shows that the corporation employed about 1221 employees. The necessity for the loans to said employees is not shown. I assume that any modern moneylender would loan money to the employees of this corporation on the same terms and conditions that were imposed by the trust agreement upon the trustees.

The record further shows that the feeling between the laborers and the...