Crescent Leather Co. v. Commissioner , 13 B.T.A. 940 ( 1928 )

CRESCENT LEATHER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Crescent Leather Co. v. Commissioner

Docket No. 13933.

United States Board of Tax Appeals

13 B.T.A. 940; 1928 BTA LEXIS 3149;

October 11, 1928, Promulgated

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Affiliation allowed.

A. L. Newton, Esq., for the petitioner.

Harold Allen, Esq., and W. R. Lansford, Esq., for the respondent.

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ARUNDELL

In this proceeding the petitioner seeks a redetermination of income and profits taxes for the year 1920, for which the Commissioner has determined a deficiency of $60,453.65. The petitioner alleges error on the part of the Commissioner in failing to hold that the Crescent Leather Co. and the Buckman Tanning Co. were affiliated during the year 1920 and entitled to file consolidated returns.

The original petition was based upon a deficiency for the calendar year 1920 of $46,063.09, and a deficiency for the calendar year 1921 of $9,777.68. By stipulation of the parties it was agreed that there was no deficiency for the year 1921, and that the true deficiency based upon the determination by the Commissioner for the year 1920 was $60,453.65. It was further stipulated that the alleged deficiency for 1920 of $60,453.65 was predicated upon an alleged taxable consolidated net income of the Crescent Leather Co. and the Haverhill Strand Theatre of $151,441.82 for the year 1920. It was further stipulated that an alleged loss of $118,408.63 of the Buckman Tanning Co. for the year 1920 was disallowed by the respondent in arriving at said income of $151,441.82, by reason of the respondent's denial of affiliation between the petitioner and the said Buckman Tanning Co.

FINDINGS OF FACT.

The petitioner is a corporation organized under the laws of the Commonwealth of Massachusetts, with principal place of business at Number 96 South Street, Boston, Mass.

Benjamin J. Kaplan owned 99 per cent of the stock of petitioner during the years 1919 and 1920. In 1919 petitioner had hides that it desired to have tanned by the Buckman Leather Co. The latter company was in financial difficulties and it was feared that it might be unable to complete the tanning of the hides. Thereupon Kaplan entered into an arrangement with Alvah Buckman, who owned the Buckman Leather Co., whereby Kaplan paid the debts of the Leather Company up to the first mortgage. A new company was then organized, known as the Buckman Tanning Co., which took over the assets of the Buckman Leather Co. The entire stock of the Buckman Tanning Co. was issued to Kaplan and Buckman in equal amounts. Kaplan loaned the new company about $175,000 and in addition advanced money to Buckman for his own private use since Buckman was without funds.

At the time of the organization of the Buckman Tanning Co. several contracts were executed. One contract between Kaplan and the Buckman Tanning Co. provided that Kaplan would be employed for a term of five years from August 1, 1919, as general manager of the company; that no act should be done by said Buckman Tanning Co. affecting its general policy except with the approval of said Kaplan or the Crescent Leather Co., it being understood, however, that so far as matters of general policy are concerned neither this term nor the powers of said Kaplan as general manager shall be deemed to include the matter of determining who shall be the officers of such corporation nor matters connected with or affecting the contracts of said corporation and the Crescent Leather Co., nor the matter of terminating the contract of Alvan Buckman, nor defining the duties of said Buckman.

A second agreement provided that in the event of the death or incapacity of Kaplan, the Crescent Leather Co., acting by such person or persons as it may from time to time select, shall determine the general policy of said Buckman Tanning Co. for the period of five years from August 1, 1919, subject to the following limitations: (1) such determinations shall be in good faith and shall be made by said Crescent Leather Co. with a view to the vest interests of said Buckman Tanning Co., (2) the control of the Crescent Leather Co. of the general policy of said Buckman Tanning Co. shall not be deemed to include the matter of determining who shall be the officers of said Buckman Tanning Co. nor matters connected with or affecting the contract between Buckman Tanning Co. and said Crescent Leather Co., nor the matter of terminating the contract of employment between the Buckman Tanning Co. and Buckman, nor of defining the duties of said Buckman.

A third agreement between the Buckman Tanning Co. and Buckman provided that Buckman should be employed for five years from August 1, 1919, as manager of the actual operation of tanning and finishing at the plant with no authority to buy or sell hides, skins or leather or to make agreements for tanning or finishing except with the approval of Kaplan or his successors in interest.

A fourth agreement was entered into between the Buckman Tanning Co. and the Crescent Leather Co., covering a period of five years from August 1, 1919, and providing for the work to be performed by the Buckman Tanning Co. and the price to be paid for such work.

On August 1, 1919, Kaplan signed a statement wherein he declared that "he held for the benefit of the Crescent Leather Company all shares or benefits derived or obtained and to be derived or obtained by him from the Buckman Tanning Company or Alvah Buckman, particularly under the agreements heretofore cited, and that the Crescent Leather Company agreed to indemnify Benjamin J. Kaplan of and from any liability or loss on account of said agreements."

On August 6, 1919, an agreement was signed by Buckman, which provided that he would pay the debts of the Buckman Leather Co. in excess of certain specified obligations and amounts, out of the first profits of the Buckman Tanning Co., otherwise payable to him, and that his stock would stand as security for the performance thereof.

During the year 1920 the Buckman Tanning Co. suffered a loss from operations, amounting to $118,408.63.

OPINION.

ARUNDELL: The petitioner claims that it is affiliated with the Buckman Tanning Co. on the ground that it controlled through Kaplan substantially all of the stock of the Buckman Tanning Co.

The two companies were operated as one enterprise. The office manager of petitioner acted as bookkeeper and general financial man for the Buckman Tanning Co.; the books and records of both companies were kept in the office of petitioner and the evidence discloses that Kaplan exercised actual control over the business. The interests of Buckman were so dependent upon the support of Kaplan and the business of the petitioner and Buckman's rights and activities were so controlled by the agreements to which he was a party, that in effect he became no more than an employee of the Buckman Tanning Co. who was entitled to share in the profits of the business that remained after certain liabilities were paid on his account. The stock standing in Buckman's name was voted in accordance with Kaplan's directions and in every substantial way Kaplan and petitioner controlled the stock. See ; ; .

We believe that the requirements of section 240 of the Revenue Act of 1918 have been fully met and that petitioner and the Buckman Tanning Co. were for the year 1920 entitled to file consolidated returns.

The operating loss of the Buckman Tanning Co. for 1920 of $118,408.63 was denied by the respondent, but the respondent did not introduce any testimony as to the profit or loss of that company for 1920, showing a different amount. The petitioner having established that the books of account were destroyed, called as a witness the officer who had charge of the books of account of the Buckman Tanning Co. in 1920 and who made up the tax return of the petitioner for 1920. This witness testified that the books of account of the Buckman Tanning Co. suppported the figures contained in schedules attached to the return of petitioner, showing the net loss for the Buckman Tanning Co. to be $118,408.63 for the year 1920.

In the absence of any evidence to the contrary, we must hold that the Buckman Tanning Co. suffered a loss of $118,408.63 in 1920.

Judgment will be entered under Rule 50.