Wobbers, Incorporated v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 36874
| Decision Date | 08 June 1932 |
| Docket Number | 36875,36876.,Docket No. 36874 |
| Parties | WOBBERS, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. WOBBER BROTHERS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SCHWARTZ-KASSER IMPROVEMENT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
F. E. Youngman, Esq., for the petitioners.
H. A. Cox, Esq., for the respondent.
The respondent has asserted deficiencies against each of the petitioners for the years and in the amounts as follows:
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Petitioner | Year | Deficiency
-----------------------------------------------|------|-------------
Wobber Brothers ______________________________ | 1924 | $14,614.84
Wobbers, Incorporated ________________________ | 1923 | 2,030.53
| 1924 | 3,971.30
| 1925 | 1,628.22
Schwartz-Kasser Improvement Company __________ | 1924 | 356.69
| 1925 | 734.60
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The total of the deficiencies for each year results from adjustments to income of the affiliated group. The respondent has allocated the total in proportion to the net income of each of the petitioners.
The following questions are presented for determination: (1) Where installment contracts receivable are transferred by a partnership to a corporation along with other assets in exchange for all of the stock of the corporation, are the amounts subsequently collected on such installment contracts or any part thereof income taxable to the corporation when received? (2) Did the respondent err in including as income for 1924 amounts of $64,000 and $4,480 which the petitioners allege were collected in 1925 and 1923, respectively? (3) If any part of the installment payments received by the corporation constitute income taxable to it, then did the respondent err in not allowing as a deduction in respect of each payment a proportionate part of the expenses incurred and paid in connection with the sale? and (4) What is the basis for depreciation deductions in 1923, 1924 and 1925 on certain buildings owned by the petitioner, Wobber Brothers?
At the close of the hearing the respondent was permitted to amend his answers in Wobbers, Incorporated, Docket No. 36874, and Schwartz-Kasser Improvement Company, Docket No. 36876, to allege affirmatively that if the Board should find that the amounts of $64,000 and $4,480 were received by Wobber Brothers in 1925 and 1923, respectively, as contended by the petitioners, then such amounts represented income to the affiliated group in those years. By proper motion he asks that the deficiencies be increased accordingly.
FINDINGS OF FACT.
The petitioners are California corporations, with their principal offices in San Francisco. The petitioner, Wobber Brothers, hereinafter referred to as the corporation, was organized on August 16, 1923, to acquire the business of Wobber Brothers, a partnership, hereinafter referred to as the partnership. It is the parent corporation and owns all of the capital stock of the other two petitioners. After organization of the corporation, the three petitioners were affiliated and filed consolidated income-tax returns, which were accepted by the respondent.
On September 4, 1923, the corporation acquired certain assets from the partnership, subject to partnership liabilities, in exchange for all of its authorized capital stock of 10,000 shares having a par value of $100 each which was distributed equally among the three partners. Included in the assets so acquired were two executory contracts covering sales by the partnership of certain theatre leaseholds and equipment. One contract dated November 20, 1922, covering the sale of certain theatres in Monterey, California, had a balance due thereunder of $17,200. It had been entered into for a total consideration of $41,800, of which $2,500 was paid upon execution of the agreement and $17,500 on December 30, 1922, when the purchasers finally determined to buy. The remaining payments were made as follows, those after September 4, 1923, being made to the corporation:
June 29, 1923 _________________________________________ $4,600
Dec. 28, 1923 _________________________________________ 4,480
June 30, 1924 _________________________________________ 4,360
Dec. 29, 1924 _________________________________________ 4,240
July 1, 1925 __________________________________________ 4,120
Profit from the sale was reported by the partnership on the installment basis and returns on such basis were accepted by the respondent.
The other contract acquired by the corporation on September 4, 1923, which covered the sale of the Imperial Theatre in San Francisco, had a balance due thereunder of $191,999.98. It had been entered into on January 1, 1920, with the Famous Players-Lasky Corporation, for a total consideration of $400,000, to be paid in seven equal annual installments, the first to be paid January 1, 1920, and the remaining installments to be paid on January 2, of each succeeding year. The unpaid balance of the purchase price was to draw interest at the rate of 6 per cent per annum from January 1, 1920.
The Imperial Theatre lease had been acquired by the partnership without cost prior to January 1, 1920. Improvements had been installed prior to the sale at a cost of $1,740.18. In connection with the sale the partnership incurred sales commissions amounting to $69,777.09, which were paid as follows, the payment after September 4, 1923, being made by the corporation:
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Paid to | Date of payment | Amount
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H. Rothchild ___________________________ | Mar. 2, 1920 | $15,000.00
J. A. Partington _______________________ | Mar. 5, 1920 | 4,291.45
H. Rothchild ___________________________ | Jan. 4, 1921 | 5,000.00
J. A. Partington _______________________ | _______________ | 7,271.43
H. Rothchild ___________________________ | Oct. 31, 1921 | 5,000.00
J. A. Partington _______________________ | Dec. 31, 1921 | 6,928.52
J. A. Partington _______________________ | Dec. 30, 1922 | 7,085.71
J. A. Partington _______________________ | Dec. 31, 1923 | 6,742.85
J. A. Partington _______________________ | Dec. 30, 1924 | 6,399.99
J. A. Partington _______________________ | Dec. 31, 1925 | 6,057.14
| | ___________
Total ______________________________ | _______________ | 69,777.09
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Payments under the contract were made by the Famous Players-Lasky Corporation as they became due. After September 4, 1923, the corporation collected payments of principal and interest on January 2, 1924, and January 2, 1925, in the respective amounts of $67,428.57 and $64,000.
In the partnership income-tax return for 1920 the Imperial Theatre sale was reported on the installment basis and profit was computed as follows:
Imperial Theatre lease
First installment payment _________________________ $57,714.29
Less
Bonus to J. A. Partington _______________ $4,271.43
Bonus to H. L. Rothchild ________________ 15,000.00
_________ 19,271.43
__________
Balance _________________________________________ 38,422.86
Add: Credit bal. in adjust. acct. ___________ 355.36
Deduct: Cost of physical equip. transferred _ 248.58
________ 106.78
__________
Net income to be reported on this account _______ 38,549.64
In the 1921 partnership return profit on the Imperial Theatre sale was computed as follows:
Profit on sale of Imperial Theatre lease
Installment received from Famous Players-Lasky Corporation ____ $77,714.29
Deduct
Bonus paid H. L. Rothchild _________________________ $10,000.00
Bonus paid J. A. Partington ________________________ 14,200.00
Cost of equip. transferred applicable to this period 248.58
Miscellaneous expense ______________________________ 61.16
__________ 24,509.74
___________
Net profit on the installment payment recd. in 1921 _________ 53,204.55
The partnership returns for 1920 and 1921 were accepted by the respondent and profit from the Imperial Theatre transaction was settled for each of the years in accordance therewith.
On their consolidated income-tax returns for 1924 and 1925, petitioners reported no profit on account of collections under the Imperial Theatre contract and the Monterey theatres contract. On the comparative balance sheet attached to the 1924 return, under fixed assets, the balance due under the Monterey theatres contract as of December 31, 1923, and December 31, 1924, was stated to be $17,200 and $4,120, respectively. The balance due on the Imperial Theatre contract as of the same dates was stated to be $191,999.98 and $60,571.41, respectively. The comparative balance sheet attached to the 1925 return discloses no decrease in the balance due under the Imperial Theatre contract and shows no balance due under the Monterey theatres contract as of December 31, 1925. Upon audit of the returns, the respondent determined that collections had been made under the contracts in the amounts of the above decreases and determined that such amount of...
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