G. Angelo Co. v. Commissioner , 12 B.T.A. 460 ( 1928 )

G. ANGELO CO. AND G. ANGELO FRUIT CO., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

G. Angelo Co. v. Commissioner

Docket No. 10869.

United States Board of Tax Appeals

12 B.T.A. 460; 1928 BTA LEXIS 3535;

June 7, 1928, Promulgated

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">*3535 1. A corporation which is shown to have derived nearly all of its gross income from trading as a principal is expressly excluded in section 200 from the exemption provided under section 218(a)(e) of the Revenue Act of 1918.

2. Where compensation for the personal services of stockholders was neither authorized, paid, nor accrued, no allowance therefor can be estimated and allowed as a deduction from income.

3. Under the circumstances petitioners are held entitled to a comparison with respresentative concerns, as provided under section 328 of the Revenue Act of 1918.

Robert C. McKay, Esq., for the petitioners.

P. J. Rose, Esq., for the respondent.

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LOVE

">*460 This proceeding results from the determination of deficiencies in income and profits taxes amounting as follows: G. Angelo, Co. for 1919, $6,409.25; for 1920, $2,163.19; G. Angelo Fruit Co. for 1919, $851.79.

Petitioners allege error with reference to the following issues: (1) In computing the deficiencies respondent has erroneously consolidated ">*461 the income and invested capital of G. Angelo Co., a personal service corporation as defined in section 200 of the Revenue">*3536 Act of 1918, with the income and invested capital of the G. Angelo Fruit Co., a trading corporation whose capital is a material income-producing factor; (2) no deduction from income has been allowed for salaries paid the officers of the G. Angelo Co.; (3) the profits tax has not been determined under section 328 of the Revenue Act of 1918.

Upon motion duly made and granted, the above issues were clarified by amended petition and all other issues were withdrawn.

FINDINGS OF FACT.

Petitioners are two Massachusetts corporations with their principal places of business at Boston. For the purpose of computing the Federal income and profits taxes for the calendar years 1919 and 1920, they have been consolidated by respondent. The stockholders and their proportional holdinds of stock are identical in the two corporations.

The G. Angelo Fruit Co. during the taxable years was engaged in the business of buying and selling fruit on its own account, employing a substantial amount of capital in its business which was a material income-producing factor.

The G. Angelo Co. hereinafter referred to as the petitioner, was engaged during the taxable years in the business of buying and">*3537 selling bananas imported by the Fruit Dispatch Co. of Boston, Mass. All purchases from the Fruit Dispatch Co. were in the name of petitioner and were upon the responsibility of petitioner. Credit was extended petitioner by the Fruit Dispatch Co. on a basis of 30 days, but it was seldom necessary to avail of a credit period longer than 15 days. The purchases were invoiced to petitioner at the prices regularly quoted by the Fruit Dispatch Co. but they were subject to an allowance or so-called commission of 5 per cent of the amount of the invoices. Petitioner specialized in the sale of the bananas to small dealers with whom the Fruit Dispatch Co. found it difficult and unsatisfactory to deal directly, and also to Italians who preferred to buy from petitioner. Sales by petitioner were at the prices regularly quoted by the Fruit Dispatch Co. and were either for cash, or were billed to the buyers by petitioner on a basis of 10 days credit. The average ripening season for the bananas was 10 days. Deliveries of the bananas were made directly from the docks, where the fruit steamers were unloaded, to the places of business of petitioner's customers, at the expense of the Fruit Dispatch">*3538 Co. Petitioner followed up collections closely and it was customary to promptly cut off the credit of any debtor who failed to make payment within a ">*462 week or two. When the cash was collected it was turned over to the Fruit Dispatch Co. The 5 per cent commission was paid to petitioners by bank check of the Fruit Dispatch Co.

The outstanding capital stock of the G. Angelo Co. amounted to a par value of $25,000 of which equal amounts of $5,000 par value were held by each of five stockholders: John Da Prato, Louis G. Rondina, Angelo Ghirardini, Virgil G. S. Ghirardini, and William G. S. Ghirardini. Said stockholders were all directors of petitioner, and they were actively engaged in the conduct of the business of petitioner. Their duties consisted of keeping informed of the expected arrivals of cargoes of bananas, personally keeping in touch with fruit peddlers and Italian fruit dealers, soliciting their orders for the fruit, and also collecting the proceeds of sales. It was often necessary for the stockholders to work from 14 to 20 hours a day. Petitioner employed one man at the docks and sometimes made sales through brokers on a commission basis.

Balance sheets">*3539 taken from the books of account of the G. Angelo Co. reflected the following:

		Dec. 31, 1919
ASSETS
Business assets other than cash:
Accounts receivable		*See below,
Cash		$23,472.99
Free assets:
Advances to G Angelo Fruit Co		19,768.50
Advances to Angelo Realty Co		273.97
Deposit in State bank (closed by State banking commissioner)
Investments:
Stock of United Fruit Co		9,666.37
Liberty bonds		1,000.00
Total		54,181.83
LIABILITIES
Business liabilities.
Trade		9,921.54
Accrued pay roll and expenses		438.00
Customers' deposits on sales
Reserve for Federal taxes		345.66
Subtotal		10,705.20
Less:
Accounts receivable	*$ 8,447.32
Transportation claim
Fruit Dispatch Co	465.27
		8,912.59
Net business liabilities		1,792.61
Dividends payable		15,000.00
CAPITAL
Capital stock		25,000.00
Surplus		12,389.22
Total		54,181.83

	Dec. 31, 1920
ASSETS
Business assets other than cash:
Accounts receivable		**See below
Cash		$37,249.73
Free assets:
Advances to G Angelo Fruit Co		2,765.02
Advances to Angelo Realty Co		Nil.
Deposit in State bank (closed by State banking
commissioner)		13,116.19
Investments:
Stock of United Fruit Co		9,666.37
Liberty bonds		1,000.00
Total		63,797.31
LIABILITIES
Business liabilities.
Trade		2,953.63
Accrued pay roll and expenses		400,00
Customers' deposits on sales		400.00
Reserve for Federal taxes		1,031.63
Subtotal		4,785.26
Less:
Accounts receivable	**666.20
Transportation claim	960.44
Fruit Dispatch Co
		1,626.64
Net business liabilities		3,158.62
Dividends payable		Nil.
CAPITAL
Capital stock		25,000.00
Surplus		35,638.69
Total		63,797.31

">*3540 The profits of G. Angelo Co., according to the books, were as follows:

	Year 1919		Year 1920
	Expenses	Income	Expenses	Income
Commissions		$26,998.05		$35,760.36
Excess of sales over purchases		1,483.15		399.14
Interest		391.00		394.12
Dividends		700.00		805.00
Employee at dock, salary	$2,609.33		$2,625.00
Office employees, salaries	1,285.00		1,613.00
Brokerage paid	2,882.87		5,473.07
Office supplies, sundry expenses
legal expense, general expense,
rent, taxes	2,306.69		1,828.26
Bad debts	238.68		366.18
Total	9,321.57	29,482.29	11,905.51	37,358.62
Profit for year	20,160.72		25,453.11
	29,482.29	29,482.29	37,358.62	37,358.62

">*463 During the taxable years no salaries were voted or paid the officers of stockholders of G. Angelo Co.

Dividends were declared and paid by G. Angelo Co. as follows:

		Paid
Date	Amount declared	Date	Amount
Mar. 23, 1919	$25,000	Aug. 5 - Dec. 4, 1919	$12,500
Jan. 26, 1920	15,000	January, 1920	15,000
		Feb. 7 - Apr. 20, 1921	15,000

The G. Angelo Co. filed personal service corporation tax returns, form 1065, for">*3541 the calendar years 1919 and 1920.

OPINION.

LOVE. In the first issue petitioner, the G. Angelo Co., claims to be a personal service corporation and, therefore, it is exempt from taxation as a corporation as provided in section 200 and section 218(e) of the Revenue Act of 1918. The provisions of section 200 material to the issue are as follows:

The term "personal service corporation" means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include any foreign corporation, nor any corporation 50 per centum or more of whose gross income consists either (1) of gains, profits or income derived from trading as a principal, or (2) of gains, profits, commissions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.

The statute expressly excludes from the term "personal service corporation" any corporation 50 per cent or more of whose gross">*3542 ">*464 income consists of gains, profits or income derived from trading as a principal. We will consider first the question whether petitioner is a trader as a principal. If so, that is an end to the issue. A trader is -

One who makes it his business to buy merchandise, or goods and chattels, and to sell the same for the purpose of making a profit. Bouvier's Law Dictionary.

The weight of authority seems to be that the proper description of the business of a trader includes both buying and selling either goods or merchandise or other goods ordinarily the subject of traffic. .

It is well settled that a trader or merchant is one who buys in order to sell. .

Nearly all of the gross income of petitioner was derived from the trading.

Petitioner was the fortunate possessor of a form of good will due to the preference of their fellow countrymen to deal with the stockholders of petitioner. In addition the stockholders were qualified and were willing to exert themselves in selling to and collecting from small peddlers of bananas. In consequence, ">*3543 petitioner operated under an arrangement with an importer of bananas whereby petitioner was allowed 5 per cent from the amount of its purchases. The importer was a wholesaler of the fruit and its regularly quoted prices established the prices at which petitioner sold to its customers and also at which petitioner was invoiced for its purchases, it being understood, as stated, that the purchases were subject to the allowance of the 5 per cent "discount" or "commission." These so-called "commissions" constituted practically all of the gross income of petitioner. It is admitted by petitioner and also is in evidence that the importer of the fruit billed petitioner for all purchases and petitioner was financially responsible for them, assuming all risks incident to resales to its customers. There is a certain amount of evidence of close cooperation between the importer and petitioner, and of intention to allow petitioner not less than commission rates of about 3 per cent after taking care of bad debts, nevertheless we do not find anywhere in the record a basis for a conclusion that petitioner was relieved of its liability for its purchases or that its relation was other than a buyer of">*3544 the bananas. Petitioner acted solely on its own behalf as a principal and it bought and sold the bananas for its own account and at its own risk. It was the exemption provided in section 218(e) for "personal service corporations."

">*465 The second issue is in the alternative. Petitioner, the G. Angelo Co., claims the right to the deduction of a reasonable allowance for salaries or other compensation for personal services actually rendered by the stockholders, as provided in section 234(a)(1) of the Revenue Act of 1918. It appears that the stockholders, all of whom were active in the conduct of the affairs of the corporation, believed this close corporation to be a personal service corporation, and they failed to authorize or to pay or accrue, compensation as such for their services. However, dividends were declared and paid, and petitioner proposes that we allocate in each year so much of the dividends as appears reasonable for salaries and permit the deduction of such allowances from income for the purpose of computing net income. Inasmuch as the statutory provision for the deduction of the salaries is coupled with the requirement that they shall have been paid or accrued">*3545 during the taxable year the proposed allowance is unwarranted. Cf. ; When .

In the third issue petitioner claims the right to a comparison with representative concerns as provided under sections 327 and 328 of the Revenue Act of 1918. We believe that the total absence of salaries to the stockholders whose personal activities were so instrumental in producing the income of petitioner creates in this case somewhat of an abnormality of income. Petitioner should have full benefit, if any, afforded by the computations provided under section 328. See .

Further proceedings will be had under Rule 62(c).