Radiant Glass Co. v. Commissioner ( 1929 )

RADIANT GLASS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Radiant Glass Co. v. Commissioner

Docket No. 17980.

United States Board of Tax Appeals

16 B.T.A. 610; 1929 BTA LEXIS 2551;

May 21, 1929, Promulgated

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1. Held that the holding of the respondent that petitioner was not affiliated with another corporation in 1921 did not operate to deprive petitioner of its right of election between the two methods of returning its income provided in section 240(a) of the Revenue Act of 1921.

2. Held that petitioner, in filing a separate return for the year 1922, made its election under section 240(a) of the Revenue Act of 1921 and its tax must be computed upon the basis of that return.

J. B. Grice, C.P.A., for the petitioner.

F. R. Shearer, Esq., for the respondent.

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SIEFKIN

This is a proceeding for the redetermination of a deficiency in income taxes for the calendar year 1922 in the amount of $405.62.

It is alleged that the determination of the deficiency is due to the failure to treat the petitioner and the Times Record Co. of Fort Smith, Ark., as affiliated corporations.

FINDINGS OF FACT.

The petitioner is an Arkansas corporation with principal office at Fort Smith, Ark. It was organized in the early part of 1917 by J. S. Parks and G. D. Carney and their wives, and has continuously been in the business of manufacturing glass. Parks was president and Carney was treasurer, and the stock was owned by them and their wives from the beginning to and through 1922.

The Times Record Co. is also a corporation and publishes a newspaper, the Fort Smith Times Record. All of the stock of this corporation was acquired in 1920 by Parks and Carney, from John D. Aue. Shortly thereafter they sold 40 shares back to Aue.

The outstanding stock of the two corporations during the year 1922 was held as follows:

Stockholder	Radiant Glass Co.	Per cent	Times-Record Co.	Per cent
J. S. Parks	25	25	254 1/2	46.36
Grace Parks (wife)	25	25
G. D. Carney	49	49	254 1/2	46.36
M. N. Carney (wife)	1	1
John D. Aue			40	7.28

Stock dividend of Radiant Glass Co., November 17, 1922:

	Shares
J. S. Parks	450
G. D. Carney	251
M. N. Carney	199
	900
Stock issued by Times-Record Co. for cash:
Sept. 30, 1922, to J. S. Parks	130
Sept. 30, 1922, to G. D. Carney	130
Dec. 31, 1922, to J. S. Parks	28
Dec. 31, 1922, to G. D. Carney	28
	316

Grace Parks and M. N. Carney are the wives of J. S. Parks and G. D. Carney, respectively. The stock carried in their names was not purchased by them but was so carried to permit them to be named directors and thereby meet the requirements of the State that every corporation have not less than three directors. They took no active part in the business affairs of the two corporations. Their stock was under the control of their husbands.

Parks has been president and manager of the Times-Record Co. ever since he and Carney acquired the stock in 1920. Parks and Carney had been long associated and they went into all business enterprises on a "fifty-fifty" basis.

Petitioner was on a paying basis but the Times-Record Co. lost money from 1920 to 1923. Numerous and substantial payments of money were made by petitioner to the Times-Record Co. to meet payroll expenses during that time.

The two corporations had the same stockholders in 1922 as in 1921, and the percentages of the holdings were the same until the stock dividends were declared in 1922.

The petitioner filled out and filed with the collector of internal revenue a questionnaire (Form 819) about the time of filing its 1921 tax return, and therein showed the stockholdings and percentages in respect of both the petitioner and the Times-Record Co. A similar questionnaire was filled out and filed by the Times-Record Co. with its 1921 tax return. These questionnaires were filed for the purpose of obtaining classification as affiliated corporations.

The questionnaire filed by the petitioner with the collector in 1922 was acted upon by the Affiliation Section of the Bureau of Internal Revenue as of June 29, 1922, and it was ruled that the petitioner and the Times-Record Co. were not affiliated.

The petitioner, about June, 1922, received a communication from the respondent, in which it was stated that petitioner was not affiliated with the Times-Record Co. As a result of this the two corporations filed separate income-tax returns for the year 1922. Respondent later held that the two corporations were affiliated in 1921.

In 1923 Parks and Carney acquired the 40 shares of stock from Aue, and for that year petitioner filed its income-tax return on a consolidated basis. The respondent allowed affiliation for the years 1924, 1925, and 1926.

On October 22, 1925, after the return for the year 1921 had been checked, the petitioner and the Times-Record Co. wrote the following letter to the respondent:

OCTOBER 22, 1925.

COMMISSIONER OF INTERNAL REVENUE,

Washington, D.C.

DEAR SIR:

Revenue Agent J. C. Davis has investigated the income tax liability of the Radiant Glass Company and The Times-Record Company, both corporations with general offices at Fort Smith, Arkansas, for the calendar years 1922 and 1923 and he has explained his findings to us.

During 1922, the Parks and Carney families owned 100 per cent of the Radiant Glass Company and 96 per cent of the Times-Record Company stock, and during 1923 these families owned 100 per cent of the capital stock of both of these corporations. The Radiant Glass Company has continually advanced large sums of money for the operations of the Times-Record Company. For that reason we are of the opinion that we are entitled to be assessed on a consolidated basis for the calendar year 1922 and we therefore pray for a consolidated assessment for the calendar years 1922 and 1923.

Yours respectfully,

RADIANT GLASS COMPANY

By

President.

THE TIMES RECORD COMPANY

By

President.

OPINION.

SIEFKIN: The respondent concedes that substantially all of the stock of the petitioner and the Times-Record Co. was owned or controlled by the same interests in 1922, and that if petitioner had properly exercised its election in 1922 it would have been entitled to have its tax computed upon a consolidated basis. Respondent held that since petitioner had filed a separate tax return for the year 1922 it had exercised its election to be taxed as a separate corporation.

Section 240 of the Revenue Act of 1921 provides:

(a) That corporations which are affiliated within the meaning of this section may, for any taxable year beginning on or after January 1, 1922, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner.

The petitioner, as a result of the respondent's denial of its claim of affiliation as to the year 1921, filed a separate return for the year 1922. Petitioner contends that the action of respondent amounted to a deprivation of petitioner's right of election as to the manner in which its tax should be computed. However, the action of the respondent as to the year 1921 could not possibly have deprived petitioner of any right as to 1922 granted by the Revenue Act of 1921.

Petitioner further contends that its own action in filing a separate return for the year 1922 did not constitute an election, since it was acting under a misconception of its rights.

Section 240(a) of the Revenue Act of 1921 clearly states that affiliated corporations may file either separate or consolidated returns. Petitioner knew the circumstances surrounding the two corporations, but, as a result of the holding of the respondent that petitioner was not affiliated in 1921, it filed a separate return for the year 1922. However, the burden is upon the petitioner to show that no election was made, and it has not proved to us that it acted in ignorance of its rights. See .

We must hold that petitioner elected to file a separate return under section 240(a) of the Revenue Act of 1921 and its tax for the year 1922 must be computed upon the basis of that return.

Reviewed by the Board.

Judgment will be entered for the respondent.