Wagegro Corporation v. Commissioner of Internal Revenue

• Citation: 38 BTA 1225
• Decision Date: 22 November 1938
• Docket Number: Docket No. 82077.
• Parties: WAGEGRO CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

38 B.T.A. 1225 (1938)

WAGEGRO CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 82077.

Board of Tax Appeals.

Promulgated November 22, 1938.

William R. Green, Jr., Esq., and Jerome R. Hellerstein, Esq., for the petitioner.

Philip M. Clark, Esq., for the respondent.

Respondent determined a deficiency of $94,918.68 in petitioner's income tax for the fiscal year ended May 31, 1933. Petitioner assails (1) the addition to income of the amount of deferred profit on a sale of stock alleged to have been made on the installment plan, or, in the alternative, contends that the amount of profit determined was excessive, and (2) the disallowance of a deduction for officers' salaries.

FINDINGS OF FACT.

1. The petitioner is a Delaware investment corporation, with its principal office in Wilmington, Delaware. During petitioner's fiscal year June 1, 1932, to May 31, 1933, Wallace Groves was president and owned 100 percent of the stock of petitioner and Compania Montana, and his brother, George Groves, was vice president of petitioner but owned no stock in Compania Montana. On December 15, 1931, petitioner purchased from Wallace Groves 292,500 common shares of the Yosemite Holding Corporation for $155,850. On June 10, 1932, it received the following letter from Wallace Groves, and accepted the offer:

WALLACE GROVES 1158 Fifth Avenue New York June 10, 1932. George S. Groves and Wagegro Corporation.

This is to confirm our conversation and understanding: For $10 and other considerations, I agree to cause Compania Montana, of which I am president, to purchase 292,500 shares of common stock of Yosemite Holding Corporation for the sum of $850,000 payable in ten equal installments of $85,000 each subject to the following:

Delivery and sale to be made in Halifax within sixty days.

As part of the purchase price Compania Montana to pay attorney fees and/or other expenses up to $750. Any expense in excess of this to be paid by Wagegro Corporation. Wagegro to pay for transfer stamps.

/S/ WALLACE GROVES Accepted /S/ GEO. S. GROVES

In the preparation of a formal agreement of sale, Wallace Groves, as president of petitioner, employed Baldwin, Hutchins & Todd to consult on the matter and later to prepare the contract and advise on the details of the transaction. That firm sent Wallace Groves a bill for $750 for such services, of which he paid $740 on May 19, 1933, and for which he was reimbursed by Compania Montana by check for $750 dated June 6, 1933.

On June 30, 1932, the following agreement was made by petitioner and Compania Montana:

AGREEMENT made at St. John, Province of New Brunswick, Dominion of Canada, dated June 30th, 1932, between The Wagegro Corporation, a Delaware corporation (hereinafter sometimes referred to as the "Seller"), and Compania Montana, a Panama corporation (hereinafter sometimes referred to as the "Purchaser"),

WITNESSETH: That for and in consideration of the mutual agreements herein contained, the parties hereto hereby agree as follows:

1. The Seller agrees, upon the execution and delivery of this Agreement, to sell, assign and deliver or cause to be assigned and delivered to or upon the order of the Purchaser, and the Purchaser agrees to purchase certificates representing 292,500 fully paid and non-assessable shares of the common stock of Yosemite Holding Corporation, a Delaware corporation, for the sum of $850,000., to be paid by the Purchaser to the Seller in ten equal annual installments; such purchase price to be evidenced by an installment note providing for the payment of installments of the following amounts on the following dates:

                Installments Due
                     $85,000____________________________ July 1, 1933
                      85,000____________________________ July 1, 1934
                      85,000____________________________ July 1, 1935
                      85,000____________________________ July 1, 1936
                      85,000____________________________ July 1, 1937
                      85,000____________________________ July 1, 1938
                      85,000____________________________ July 1, 1939
                      85,000____________________________ July 1, 1940
                      85,000____________________________ July 1, 1941
                      85,000____________________________ July 1, 1942
                

with interest on the unpaid balance at the rate of 5% per annum, payable annually on the first day of July.

2. The closing under this Agreement shall take place in the City of St. John, Province of New Brunswick, Dominion of Canada, on the thirtieth day of June, 1932, at the office of The Royal Bank of Canada. Hotel Admiral Beatty

IN WITNESS WHEREOF the parties have duly executed this Agreement, in duplicate, as of the day and year first above written.

THE WAGEGRO CORPORATION (SEAL) By ALBERT A. SOMMERWERCK Second Vice President

Witness:

L. B. RILEY COMPANIA MONTANA (SEAL) By E. HILLIARD Vice President

Attest:

L. B. RILEY Secretary

On June 30, 1932, certificates representing the 292,500 shares of Yosemite stock were delivered by Albert A. Sommerwerck to an officer of Compania Montana, and the installment note was delivered. After that the certificates were kept in Montreal.

Incident to the sale of the Yosemite stock petitioner incurred expenses of not less than $677.06.

Petitioner filed its return for the fiscal year June 1, 1932, to May 31, 1933, on August 11, 1933, with the collector of internal revenue for the district of Delaware. The return was on a cash receipts and disbursements basis, the basis on which its books were kept. No income from the sale of the stock was shown on the return. Petitioner did not treat the $750 legal fees paid to Baldwin, Hutchins & Todd as part of the purchase price of the 292,500 shares of Yosemite stock.

2. For the fiscal year ended May 31, 1933, petitioner paid as salaries $7,000 to Wallace Groves, its president and on June 10, 1932, its sole shareholder, and $9,500 to George Groves, its vice president and secretary until May 19, 1933.

Wallace Groves was a lawyer and had had some experience in the finance, investment banking, and small loan business. He devoted some, but "considerably" less than a major part, of his time to the affairs of petitioner — all the time he thought they needed. He "watched the company", helped to improve its assets and earnings, and worked on the Yosemite Holding Co. stock transaction.

George Groves was Wallace Groves' brother. He had had "considerable" experience in the type of business in which petitioner was engaged and had contacts in this field of business. He was otherwise employed, and a portion of his time was devoted to petitioner's affairs in an effort to make its business profitable. He did more for petitioner than Wallace did.

A reasonable allowance for salaries and other compensation paid by petitioner for services actually rendered to it by Wallace Groves and George Groves in the taxable year is $3,000.

OPINION.

STERNHAGEN:

1. The petitioner, in accounting on its return for the gain from the...