American Cities Power & Light Corp. v. Commissioner ( 1938 )

AMERICAN CITIES POWER AND LIGHT CORPORATION, MANAGER, THE NORTH AMERICAN COMPANY COMMON STOCK TRADING ACCOUNT #5, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

CONSOLIDATED HOLDINGS CORPORATION, MANAGER, THE NORTH AMERICAN COMPANY COMMON STOCK TRADING ACCOUNT #6, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

CONSOLIDATED HOLDINGS CORPORATION, MANAGER, PREFERRED STOCK TRADING ACCOUNT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. REVENUE, RESPONDENT. COMPANY COMMON STOCK TRADING ACCOUNT #3/3-2, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

CONSOLIDATED HOLDINGS CORPORATION, MANAGER, NORTH AMERICAN COMPANY COMMON STOCK TRADING ACCOUNT NO. 3-2, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

American Cities Power & Light Corp. v. Commissioner

Docket Nos. 82582, 82583, 82584, 82585, 85027.

United States Board of Tax Appeals

38 B.T.A. 74; 1938 BTA LEXIS 916;

July 15, 1938, Promulgated

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An agreement, called an "account", among several recipients of periodic stock dividends, desiring to convert them into cash without disturbing the market, whereby one of their number is empowered for a limited time to sell such shares, held, under all its terms not to amount to a taxable "association."

John F. Dooling, Jr., Esq., for the petitioners.

Eugene H. Smith, Esq., for the respondent.

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STERNHAGEN

The Commissioner determined that the petitioners are associations taxable as corporations and computed the following deficiencies in their respective income taxes:

Year	Petitioner	Deficiency
1932	American Cities Power & Light Corporation, Manager, etc., Account #5.	$11,196.88
1932	Consolidated Holdings Corporation, Manager, etc., Account #6	3,318.95
7/15/32-12/31/32	Consolidated Holdings Corporation, Manager, Preferred Stock Trading Account.	377.35
8/3/32-12/31/32	Consolidated Holdings Corporation, Manager, etc., Account #3/3-2	508.41
Fiscal year ended 6/30/33	Consolidated Holdings Corporation, Manager, etc., Account #3-2	99.94

The petitioners contend that they are agencies of the holders of participating interests in accounts and that the accounts are not associations. They also challenge the adequacy of the addresses on the deficiency notices, and plead the bar of the statute of limitations.

FINDINGS OF FACT.

The American Cities Power & Light Corporation (herein called American Cities) is a Virginia corporation, with principal office at Jersey City, New Jersey; its wholly owned subsidiary, Consolidated Holdings Corporation (herein called Consolidated Holdings) is a New York corporation, with principal office at New York, New York. During 1932 the business of each was investment in securities, and they were connected by shareholdings with nine other corporations, engaged in the same business. All the officers of the eleven were drawn from a group of seven men. The other nine croporations were (1) the Central States Electric Corporation (herein called Central Corporation), owner of all of the stock of (2) Utilities Shares Corporation (herein called Utilities), all of the stock of (3) Central States Electric Co. (herein called Central Co.), 65 percent of the class B (common) stock of American Cities, 45 percent of the common stock of (4) Electric Shareholdings Corporation (herein called Electric Shareholdings), and 45 percent of the common stock of (5) the Shenandoah Corporation (herein called Shenandoah). Shenandoah owned 85 percent of the common stock of (6) the Blue Ridge Corporation (herein called Blue Ridge), and all of the stock of (7) the Yorkport Corporation (herein called Yorkport). Electric Shareholdings owned all of the stock of (8) the Falkland Corporation (herein called Falkland), and Blue Ridge owned all that of (9) the Rector Holding Corporation (herein called Rector).

These corporations held large amounts of the common stock of the North American Co. (herein called North American), which during the period October 1, 1923, to July 1, 1933, paid dividends on its common stock quarterly in shares of its common stock, but none in cash. Throughout 1932 Central Corporation owned over 700,000 North American shares, which constituted over 50 percent of its investments and from the dividends on these shares it derived almost all of what it regarded as its income. Shares of this stock also constituted over 50 percent of the respective investments of American Cities and of Electric Shareholdings, and 18 percent to 20 percent of the respective investments of Blue Ridge and Shenandoah. The corporations in the group annually received an aggregate of about 160,000 shares of North American as stock dividends, which were in each case a very substantial part of what they treated as their income. They all had cash requirements for interest obligations, preferred stock dividends, taxes, and operating expenses, and desired to sell the stock dividend shares, but their executives were reluctant to do so on the open market, fearing that such large offerings would reduce the price obtainable and the value of investments in the stock.

Under these circumstances American Cities, Central Co., Blue Ridge, and Shenandoah executed an agreement on January 2, 1932, to form "The North American Company Common Stock Trading Account" - known as Account #5 - "to trade in the common stock of The North American Company." The interests and liabilites of the participants were fixed by percentages, and an interest was assignable by one party only with the written consent of the others. American Cities was designated as manager to serve without compensation, and was given sole discretion over transactions and operations of the account, payments to and by participants, and sales, which were generally made through the North American Securities Co. under a contract with the latter and subject to a limitation of 50,000 shares on any one commitment. The agreement was to terminate on June 30, 1932, or sooner by mutual agreement, and the participants agreed that, at expiration, they would:

* * * take up and pay for their respective pro rata portions of any net long position or any net short position of the account, at the total cost thereof to the Account. The participants shall share the profits and losses of the Account pro rata in proportion to their respective participations, after allowing for all expenses * * *.

Shares were to be "purchased from the participants for the Account" at the market price less $1.125 each in such number as the manager determined with all participants' consent. The last section provided:

FIFTH: Nothing herein contained shall constitute the participants or the Manager partners with each other or render any participant liable for the obligations of the others hereunder, except that in case any participant shall default in paying any of its obligations in respect of the Account the amount so in default shall be treated as a loss of the Account, and the other participants shall share such loss in proportion to their respective participations, without, however, relieving the defaulting participant from its full obligation to the other participants. * * *

The North American Securities Co. (herein called the Securities Co.), through which the sales of shares were to be made, was engaged in the business of selling and distributing securities, "preponderately" (sic) common shares of North American, for the account of others. On June 18, 1931, it had agreed with the Central Co., as manager of a North American common stock trading account, to use its best effort to sell such stock for the latter's account, as requested, up to 200 shares daily. These sales were to be made to dealers and not on a stock exchange although at current stock exchange prices. The dealers in turn were to sell the shares directly to bona fide purchasers for investment, and were to receive a specified amount for each share sold an additional amount for each share held by the purchaser for a specified period. On October 7, 1931, American Cities was substituted as manager of the account, and on January 2, 1932, the Securities Co. agreed to make sales of North American common shares for American Cities, as manager of the account authorized by the agreement of that date, on the same conditions.

On January 2, 1932, Consolidated Holdings, Utilities, Rector, and Yorkport by an agreement identical in terms with that of Account #5 above described, formed a "North American Company Common Stock Trading Account" - known as Account #6 - "to trade in the common stock of The North American Company", designating Consolidated Holdings as manager, and an agreement with the Securities Co., identical with the former, was immediately entered into for the sale of North American shares in this account. Upon the expiration of the specified periods on June 30, 1932, Accounts #5 and #6 were superseded by new agreements, executed by the same parties as of July 1, 1932, which were similar in terms to the former, and were known as Accounts #7 and #8, respectively. They were to expire on December 31, 1932, but in fact were in effect only until August 2, 1932.

Principally to give effect to desired changes in participants and their percentages of participation, American Cities by a like instrument signed by it, Blue Ridge, and Electric Shareholdings, on August 3, 1932, formed an account known as #3/3-1 and Consolidated Holdings by a like instrument signed by it, Rector, and Falkland, formed an account known as #3/3-2. These agreements fixed the participants' percentages of interest and liability differing from the percentages of the participants in the agreements covering the first two periods. They were to expire on December 31, 1932, but were terminated, likewise to permit changes in participants and percentages, on December 14, 1932. On December 16, 1932, American Cities by an instrument signed by it, Utilities, Blue Ridge, and Shenandoah, formed Account #4-1, and Consolidated Holdings by an instrument signed by it, Utilities, Rector, and Yorkport, formed Account #4-2. These agreements ran to December 31, 1932, and were similar to the others except that the participants' percentages of interest differed and provision was made for a participant's disposition at discretion of a larger number of shares. The managers under these successor instruments made the same selling arrangements with the Securities Co. as were made for Account #5.

On April 25, 1933, the North American Co. Common Stock Trading Account #3-2, was created by a contract similar to the others, for the period ending June 30, 1933, but extended to July 22. Consolidated Holdings was designated as its manager.

On July 15, 1932, Consolidated Holdings, Utilities, Rector, and Yorkport executed an agreement to form a "Preferred Stock Trading Account" "to trade in" debentures and preferred stock of North American and of the North American Edison Co. for a period ending December 31, 1932. Consolidated Holdings was designated as manager, and the terms and conditions were substantially identical to those of the agreements relating to the common stock accounts except that no provision was made for sales in a special manner or through the Securities Co. This account was active until August 2, 1932, and was used for 17 transactions.

American Cities, Central Corporation, Shenandoah, Blue Ridge, and Electric Shareholdings rendered annual reports to their shareholders on December 31, and interim financial statements on June 30. The form of trading account agreement was adopted in order to secure semiannual balance of the accounts and thus abviate explanations and reports on commitments. The practice of having an account in which parent companies participated and a separate account in which subsidiary companies participated was followed primarily to simplify state franchise tax problems by segregating in the subsidiary accounts, in which all of the participants were New York corporations, the income arising from or attributable to the State of New York.

The sole security purchased and sold through the eight common stock accounts was common stock of North American, and such sales occurred every business day during 1932. Approximately 90 percent of the stock disposed of by the managers in that year passed through North American. Shares received as stock dividends by the participants constituted 20 percent of the shares delivered by the managers to North American for distribution to dealers. Eighty percent consisted of shares purchased by the managers in the market.

The participants contributed no shares or cash to the accounts as a continuing fund to be used as capital, but the account managers received shares or cash from the participants pursuant to calls therefor made from time to time, and kept on hand only so much as was needed to make deliveries of shares or make payment for purchases in completing transactions. They returned any excess to the participants. In Accounts #3/3-1 and #3/3-2 the participants were called upon for cash because the depressed market conditions then prevailing frustrated the object of selling the participants' stock for them, but in the other accounts the participants' payments of cash to the managers were repayments of money previously distributed by the managers to them.

All transactions in an account were conducted in the name of the account manager, sometimes with the addition simply of "Manager" and sometimes with the addition of "Manager [name of account]." Records of the account transactions were not kept in the manager's regular corporate books but in a separate binder for purposes of convenience. Under the agreements there were no minute books, no seal, no office, no employees, and nothing resembling stock certificates was issued to evidence a participant's interest. Shares received from a participant were registered in the name of the participant's nominee and so carried by the manager. At no time was there only one nominee or a manager's nominee. Shares received from brokers or others were in street names. For dividend collections shares on hand were put in the name of a participant or its nominee.

In Accounts #5 and #6 the manager kept a separate account for each participant, indicating the number of shares received from it or returned to it as credits and debits "without any dollar amount." Cash received or paid by the manager was likewise recorded. After expiration of an account agreement the records showed the number of shares disposed of by a participant and the return to it of excess shares together with the proceeds of the participant's share sales; adjustments were made for expenses. Shares received from the participants were not recorded as purchased by the manager or the trading account; those received from brokers and others were shown in regular accounts as giving rise to accounts payable.

On June 15, 1933, a partnership income tax return for 1932 on form 1065 was filed by American Cities, as "Manager, The North American Common Stock Trading Account No. 5", reporting distributive income of $81,431.89; by Consolidated Holdings, as "Manager, The North American Company Common Stock Trading Account No. 6", reporting distributive income of $24,137.79; by Consolidated Holdings, as "Manager, Preferred Stock Trading Account", reporting distributive income of $2,744.39; by Consolidated Holdings, as "Manager, the North American Company Common Stock Trading Account No. 3/3-2", reporting distributive income of $3,697.56. On June 15, 1934, Consolidated Holdings, as "Manager, North American Co. Com. Stk. Tdg. Acct. No. 3-2", filed a partnership return for 1933, reporting distributive income of $726.81. Each of these returns was verified by the manager corporation as "manager" through one of its officers, and the business was given in each case as "Buying and Selling Securities."

On December 17, 1934, the Commissioner filed corporation income tax returns for 1932 for the managers of Accounts #5, #6, #3/3-2, and the "Preferred Stock Account", on form 1120, showing as income the amounts reported on the partnership returns. On December 18, 1935, he filed a similar return for 1933 for the manager of Account #3-2, showing as income the amount reported on the partnership return.

By separate notices dated October 2, 1935, the Commissioner notified the respective managers of Accounts #5, #6, #3/3-2 and the "Preferred Stock Account" of deficiencies in tax for 1932 determined against each as an association taxable as a corporation. By notice dated March 3, 1936, he notified Consolidated Holdings, as manager of Account #3-2, of a deficiency in tax for 1933, similarly determined against it as an association taxable as a corporation. The names of the addressees were as given on the partnership returns, and the determined amount of net income was in each case the amount of income appearing on those returns.

OPINION.

STERNHAGEN: The primary question at issue is whether, as the Commissioner has determined, each of the "accounts" is to be treated under the revenue act as an "association" taxable as a corporation. The petitioners say they are not associations, and urge that there are no features of these accounts giving them the semblance of corporate organization sufficient to justify calling them associations within any fair conception of that term. The petitioners' contention is, in our opinion, clearly correct. It is unnecessary again to catalogue the features which would bring an organization within the statutory term "association" as that term has been broadly construed in ; ; ; . The purpose of setting up these accounts was, as clearly shown by the evidenceNot to carry on a business but to provide a more convenient means of converting the stock dividends of the North American Co. into cash and at the same time minimizing the disturbances of the market. While a substantial number of shares sold by the managers of the accounts were bought on the market, this was to stabilize the market and can not fairly be called carrying on business. It is hardly enough to support the respondent's point that the function of the accounts was primarily to promote profit and is thus similar to the function of a business corporation. The respondent argues that the participants were not partners and they had limited liability. The petitioners agree now that there were no partnerships and that their filing of partnership returns was mistaken. But this negation of partnership character is not an affirmative demonstration of corporate character. If the accounts must be characterized, they might better be called joint ventures or agencies, for they had but a single narrow purpose and a definitely limited duration. The participants' liability was not limited, as in a corporation, but entire, and indeed included liability for the default of each. They had nothing resembling capital stock, and the shares or interests of the participants could be transferred only if all the other participants consented. The arrangement in each of the accounts is less like a corporation than that in ; ; ; or (on review C.C.A., 5th Cir.). The determination that these petitioners are to be taxed as corporations is reversed.

The petitioners argue also that even if they be taxable as corporations, the deficiency determinations were not timely, since the statutory period of limitations had expired when they were made. They also argue that if they be taxpayers, the deficiency notices were defective in that they were addressed not to the taxpayers, namely the accounts themselves, but to the "managers." Neither of these points requires decision now that it is held that the accounts are not taxable.

Judgment will be entered for the petitioners.