United Business Corporation of America v. Commissioner of Internal Revenue, Docket No. 24641
| Decision Date | 30 April 1930 |
| Docket Number | 25149.,Docket No. 24641 |
| Citation | 19 BTA 809 |
| Parties | UNITED BUSINESS CORPORATION OF AMERICA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. BURNS LYMAN SMITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Edmund H. Lewis, Esq., for the petitioners.
J. W. Fisher, Esq., and T. P. Dudley, Jr., Esq., for the respondent.
These proceedings were consolidated for hearing and decision and involve deficiencies in tax computed under sections 220 of the Revenue Acts of 1918 and 1921, respectively.
The deficiency against petitioner Burns Lyman Smith (hereafter referred to as Burns Smith) is for the calendar year 1920 and in the amount of $25,481.24. The deficiency against petitioner United Business Corporation of America (hereafter referred to as the corporation) is for the calendar year 1921 and in the amount of $19,710.71. In their respective petitions each petitioner asserts the following errors: (1) The alleged deficiency is not founded on an opinion certified by respondent as prescribed by sections 220 of the Revenue Acts of 1918 and 1921, and which is required with respect to all corporations which are not holding companies; respondent conceding that petitioner corporation is not such a company; (2) without reasonable justification respondent has arbitrarily and unwarrantedly determined that the gain and profits of the corporation were permitted to accumulate beyond the reasonable needs of the business; (3) respondent's assumptions that petitioner Burns Smith is subject to tax under section 220 of the Revenue Act of 1918 and that petitioner corporation is subject to tax under section 220 of the Revenue Act of 1921, are not warranted, either by act or failure to act, either by the organizers of the corporation or its subsequently elected directors; (4) the proposed interpretation of section 220 of the Revenue Acts of 1918 and 1921 will have the effect of bringing these sections into disrepute and render them null and void as being within the inhibitions contained in the Federal Constitution.
Petitioner Burns Smith further asserts that the proposed tax under section 220 of the Revenue Act of 1918 violates the Federal Constitution in that it is not a tax upon his income, but in fact is a tax upon his capital.
At the hearing both petitioners amended their respective petitions to conform to the proof and asserted that the net income upon which the respective deficiencies were computed is excessive in that the allowance for depreciation did not include a proper allowance for obsolescence of the buildings and equipment of the corporation.
FINDINGS OF FACT.
The petitioner, Burns Smith, is an individual residing in the city of Syracuse, N. Y. The petitioner, United States Corporation of America, hereinafter called the corporation, is a corporation organized on or about April 1, 1920, under the laws of the State of Washington, with its principal office in the city of Syracuse, N. Y. It has an authorized capital of $6,000,000, divided into 60,000 shares of common stock of the par value of $100 each.
During the entire period from April 1, 1920, to December 31, 1921, the petitioner, Burns Smith, held all of the outstanding shares of capital stock of said corporation, except three shares held by other trustees of the corporation, who paid nothing for their stock. The corporation issued no certificates of capital stock until March 30, 1921. At the close of the years 1922 to 1925, both inclusive, the outstanding stock of the corporation was held as follows:
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| 1922 | 1923 | 1924 | 1925
-----------------------------------------------|--------|--------|--------|---------
Burns Smith __________________________________ | 33,990 | 37,202 | 37,202 | 37,002
Lewis P. Smith _______________________________ | 1 | 1 | 1 | 1
William A. Mackenzie _________________________ | 1 | 1 | 1 | 1
James S. Westland ____________________________ | 1 | 1 | ______ | ______
J. F. Kerrins, jr ____________________________ | ______ | ______ | 1 | 1
Burnice Smith ________________________________ | ______ | ______ | ______ | 100
Virginia Smith _______________________________ | ______ | ______ | ______ | 100
|________|________|________|_______
| 33,993 | 37,205 | 37,205 | 37,205
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Burnice Smith and Virginia Smith are daughters of the petitioner, Burns Smith.
Petitioner, Burns Smith, is a son of the late L. C. Smith, who also resided at Syracuse, N. Y., and who was one of the leading figures of the typewriter industry. At the time of his death in 1910, L. C. Smith had extensive holdings in several companies. During his lifetime, L. C. Smith became interested in and acquired substantial holdings of real estate in Seattle, Wash. At the time of his death, his holdings of Seattle real estate included six commercial properties. These consisted of the land upon which was later erected the 42-story L. C. Smith Building and the Pacific, New Squire, and Union Trust Buildings, in addition to two other parcels of real estate.
L. C. Smith died intestate. His heirs were his widow, Flora B. Smith, his son, Burns Smith, and one daughter. Burns Smith was then not quite 30 years of age, and his sister was a minor. The Seattle real estate holdings of L. C. Smith were partitioned between the heirs in a legal proceeding which was not contested. In the partition proceedings, Burns Smith received the Pacific Building, and the land upon which was later erected the L. C. Smith Building.
The Pacific Building is located on the corner of Yesler Way and Occidental Avenue in the city of Seattle, and was erected in 1891. It has brick walls, with wooden joists and timbers, is not fireproof, and is known as a class B structure. It has 150 offices and 5 stores available for renting. It is 6 stories in height and is served by 2 passenger elevators.
During his lifetime, L. C. Smith had been considering the construction of a building on the site where the L. C. Smith Building was later erected. He made several trips to Seattle in connection with this project, and had secured plans for the building. These plans were prepared by a firm of architects in Syracuse, N. Y. In the latter part of October, 1910, after the plans and specifications for the building had been prepared L. C. Smith sent his son, Burns Smith, to Seattle for the purpose of filing the plans and securing the permit for the erection of the building. Upon the return of Burns Smith to Syracuse, his father met him at the train and they went to Burns Smith's house, where they talked over the details of the trip. That night, after the conference, on his way from his son's house to his home, L. C. Smith was stricken and died shortly afterwards.
Almost immediately after the death of his father, Burns Smith announced his intention of carrying out his father's wishes in the matter of the construction of the building in Seattle. His lawyers and his mother attempted to dissuade him on account of the general conditions, the fact that it was a long way from his home, and, further, because it would practically exhaust his one-third interest in his father's estate, in addition to a substantial mortgage. However, the son persisted in his determination to erect the building as a monument to his father, and tried to persuade his mother to join him in the enterprise. This she declined to do, and Burns Smith went ahead with his plans for the erection of the building.
Construction of the building began in 1913, and the building was completed in 1914. A mortgage was placed upon the building in the amount of $800,000, Burns Smith and his wife being required to endorse the mortgage note. The terms of the mortgage required serial payment upon the principal of $50,000 per year.
The building was named the L. C. Smith Building. It was situated on the northeast corner of Second Avenue and Yesler Way, in the city of Seattle, and but a short distance from the Pacific Building. It has 42 stories, and is of the highest known type of construction, being of steel frame, reinforced with concrete. It is entirely fireproof. Its exterior walls are faced with terra cotta. The first 21 floors are of uniform area. The next 14 floors are of substantially smaller area. Above them is a tower, 83 feet in height, which is equivalent to 7 floors, and contains observation platforms. There is no office space in the tower, and the office space in each of the 14 floors immediately below is comparatively small. With the exception of some teakwood doors in the Chinese room of the observation tower, and some very few other wooden doors, all of the doors are of steel. The window and sash frames throughout the building are of bronze. The main entrance is trimmed with Mexican onyx and the halls in the upper floors with Alaskan marble. Elevator service is afforded by 8 high-speed passenger elevators, and one freight elevator. Six of the passenger elevators go to the twenty-first floor, and two continue to the thirty-fifth floor. All of these elevators are operated, whether the tenancy increases or decreases, as quick service is essential in retaining tenants and securing new ones. The general level of overhead expense varies little with the loss or gain of tenants.
Exclusive of the second floor, the building contains 573 offices available for renting. The second floor is occupied largely by a subpostoffice, barber shop and other small establishments, which are for the convenience of the tenants.
This building was and remains one of the show places and, with one possible exception, the tallest building on the Pacific Coast....
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