American Circus Joint Venture v. Commissioner , 39 B.T.A. 605 ( 1939 )

AMERICAN CIRCUS JOINT VENTURE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

American Circus Joint Venture v. Commissioner

Docket No. 84020.

United States Board of Tax Appeals

39 B.T.A. 605; 1939 BTA LEXIS 1006;

March 21, 1939, Promulgated

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1. Upon evidence showing that the petitioner owned an undivided interest of 25 percent in a promissory note, held, that only 25 percent of the entire interest paid on the note should be included in its gross income.

2. A syndicate taxable as a corporation, which erroneously filed a return on form 1041, prescribed for use of fiduciaries, disclosing all items sufficient for a computation of the tax, is not subject to the penalty prescribed by section 291, Revenue Acts of 1932 and 1934 for "failure to make and file a return required by this title."

Henry Ravenel, Esq., and Lawrence A. Baker, Esq., for the petitioner.

George R. Sherriff, Esq., and Kenneth Nelson, Esq., for the respondent.

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MURDOCK

The Commissioner made determinations as follows:

Year	Income tax	25% penalty
1933	$9,343.03	$2,335.76
1934	9,347.27	2,336.82

The penalties were for failure to make and file returns. The Commissioner also determined deficiencies in excess profits tax and penalties, but the parties have now agreed that no such deficiencies and penalties are due. The issues for decision are: (1) Whether $50,378.02 should be included in the income of the petitioner for each year as interest received on a promissory note, and (2) whether the petitioner is liable for the 25 percent addition to the tax for failure to file returns. The first issue depends upon whether the petitioner owned the entire note or whether it owned only an undivided interest therein of 25.8823492 percent.

FINDINGS OF FACT.

The petitioner is a syndicate, formed on September 17, 1929, under a number of similar written agreements hereinafter described.

New York Investors, Inc. (hereinafter referred to as Investors), is a New York corporation. Receivers were appointed for it on July 14, 1933, and they were appointed trustees in 1935 in a reorganization under the Bankruptcy Act.

The Allied Owners Corporation (hereinafter referred to as Allied), is a New York corporation, organized as a subsidiary of Investors in 1927. Investors owned all of its capital stock. Allied was adjudicated a bankrupt on August 8, 1933. Trustees were appointed at that time and on July 24, 1934, trustees were appointed in a reorganization under the Bankruptcy Act.

John Ringling on September 6, 1929, borrowed $1,700,000 from the Central Hanover Bank & Trust Co. on his promissory note payable to that bank and endorsed by Investors. Investors had agreed to endorse the note and to obtain renewals up to September 6, 1934, provided that Ringling would reduce the principal of the note by $200,000 annually. Investors received from Ringling as consideration for this agreement one-half of the outstanding common stock of the American Circus Corporation and of the Circus City Zoological Gardens, Inc., but agreed to return a part of the stock if dividends on the stock should be sufficient to pay the principal and interest on the note within a period of three of four years.

Investors, on September 17, 1929, entered into the written agreements with a number of individuals and corporations which formed the petitioner. Each subscriber agreed to assume a part of the liability of Investors on the note, in consideration of the right to participate in any proceeds of the venture. The following table shows the names of the subscribers and the percentage of interest of each:

Name	Interest
	Percent
J. A. Dykman	0.5882352
W. N. Dykman	.5882352
Frank Bailey	2.941176
Compania Greva	2.941176
Bing & Bing	2.941176
Brooklyn Trust Co	2.941176
Arthur H. Waterman	1.4705882
Halsey Stuart Co., Inc	5.882352
Sphinx Trading Corporation	2.941176
Frederick J. Fuller	.5882352
S. W. Gumpertz	1.4705882
Henry A. Mark	.5882352
Total	25.8823492

The agreements named Investors as manager of the venture, and provided that it should be a participant in the venture. The amount of its participation was not stated. The subscribers agreed to pay their proportionate shares of the expenses and liability on the note upon call. The agreement was to remain in effect until finally terminated by the manager, at which time the assets of the syndicate were to be distributed. All costs and expenses were first to be paid; the subscribers were to receive the amounts paid in, with interest; one-fourth of the remaining assets were to be paid to the manager as compensation; and any balance remaining was to be distributed pro rata among the participants.

Investors and the participants originally had a plan for financing the loan through the general public, but that plan was abandoned, due to changed business conditions. They then suggested to Allied that it purchase the Ringling note. Allied purchased the note from the bank on August 14, 1930, paying therefor with its check $1,714,166.67. The note was not in default at that time. None of the funds were supplied by Investors.

Investors, as managers of the syndicate, called upon the subscribers for payment of their subscriptions on April 4, 1931. The participants, other than Investors, paid in $440,000 in accordance with their subscriptions. Investors paid that $440,000 to Allied on behalf of the syndicate for an interest of 25.8823492 percent in the note. Neither at that time nor at any other time did Investors make any payment from its own funds to Allied as a participant in the syndicate or otherwise in respect of this note.

The principal of the indebtedness had been reduced to $1,117,320.67 on July 25, 1932, and some of the $440,000 subscribed had been repaid to the subscribers. The note was then in default and on that day a new note was substituted for the old note in the amount above stated. The new note was signed by Ringling Bros.-Barnum & Bailey Combined Shows, Inc., and Circus City Zoological Gardens, Inc., as joint and several makers, and was endorsed by John Ringling. Allied was named as payee. The note was payable on or before November 6, 1937. Allied received this new note subject to the rights of the petitioner.

Supplemental syndicate agreements were entered into by Investors and the participants between August 15 and November 26, 1932. The manager was given powers to modify the agreement with Ringling in any manner deemed advisable, to substitute a new agreement with Ringling or others, to consent to the substitution of the liabilities of the other parties to the obligations of Ringling, to enter into any agreements and assume any obligations as manager for the account of the syndicate, and to acquire any property which in the judgment of the manager would be for the ultimate benefit of the venture. The agreements ratified all action theretofore taken by the manager in so far as such action would be authorized by the supplemental authorizations.

Investors resigned as manager and retired as a participant on July 15, 1937. The agreement entered into at that time describes the assets of the syndicate as consisting of certain stock, cash and an undivided interest in the note, which interest amounted to $207,058.82. The principal of the note had been reduced at that time to $800,000. The agreement provided for delivery of a part of the stock to Investors in full settlement of its rights as a participant and manager and delivery of the remaining stock and cash to the new managers. Allied was directed to pay over to the new managers, as and when received, the pro rata share of the syndicate in all future collections of principal and interest on the note.

Investors received payments of interest on the original note during the time that it was held by the Central Hanover Bank & Trust Co. and promptly turned those payments over to that bank. It continued to make collections on that note up to July 1932. The collections which it made between August 14, 1930, and April 4, 1931, were paid over promptly to Allied as the owner and holder of the note. Of the collections which it made between April 4, 1931, and July 1932, it promptly turned over 74.1176508 percent to Allied. The remaining 25.8823492 percent of the collections was either held by Investors for the benefit of the subscribers or was distributed to them. All payments of interest and principal on the new note of July 1932 were made by the makers of the note directly to Allied until January 1937. Of the collections received by Allied during the years 1932 and 1933, 25.8823492 percent was paid to Investors for the syndicate. The payment from Allied to Investors for the year 1933 amounted to $17,592.32. The payments of interest and principal made by the makers of the note during the years 1934 to 1936, inclusive, were each made by two checks drawn to the order of the trustees of Allied. One check, for 74.1176508 percent, was retained by the trustees as property of Allied, and the check for the balance of 25.8823492 percent was held by the trustees until January 1937, for the syndicate. The trustees of Allied in January 1937 endorsed the checks just described to the new managers of the syndicate. The total amount of the checks so endorsed was $72,555.79. Allied thereafter collected the entire amount of the interest due on the note and paid to the new managers of the syndicate the share thereof belonging to the syndicate. Allied sold the note in November 1937 for $800,000 and accrued interest and issued its check in the amount of $212,649.45 to the new managers in payment of the syndicate's share in the proceeds of the sale. The new nanagers, after paying expenses and setting aside reserves for future expenses, distributed the balance received to the participants, exclusive of Investors.

Allied did not at any time become a member of the syndicate and it did not receive any funds from the syndicate. It did not pay any of the expenses of the syndicate.

The books of Allied and Investors show that the syndicate owned an undivided interest of 25.8823492 percent in the note of July 1932, and the remaining undivided interest in the note was owned by Allied. Payments of interest and principal were duly entered in the accounts of Allied to show continuation of the above undivided interests. The books of Allied contain no entries showing any indebtedness of Allied to Investors on account of the note. The books of Investors show the collection of payments on the note up to July 1932, the retention after April 4, 1931, of 25.8823492 percent thereof on behalf of the syndicate, and the payment of the remainder to Allied. The books thereafter show receipts of payments representing a 25.8823492 percent interest in the note. No formal books of account were ever maintained for the syndicate, although the agreements provided for the keeping of books. The bookkeeper for Investors and Allied, who was also an officer of each company, and acted as their treasurer, kept certain records of the transactions of the syndicate for his own information but without direction from anyone in authority. He made entries in those records indicating that the syndicate owned the entire note between April 4, 1931, and December 31, 1933. He made an entry on the latter date to show his mistake, stating that Allied never had an interest in the syndicate and owned its interest in the note separately. Thereafter this record also shows that the interest of the syndicate in the note was an undivided 25.8823492 percent.

The income of Allied for the years 1930 to 1933, inclusive, was included in a consolidated return of an affiliated group of which Investors was the parent. Allied filed income tax returns for the years 1934 to 1937, inclusive. It included in its gross income for the years 1933 and 1934, as interest received, $50,378.02 representing 74.1176508 percent of the interest paid on the note of July 1932. It also included in its returns for other years the amount of interest on the note which it received and retained for itself as above described.

On behalf of the petitioner, its manager filed for the calendar years 1933 and 1934 fiduciary returns on form 1041. The return for 1933 was filed on June 15, 1934, and the return for 1934 was filed on March 15, 1935. Of the total interest on the note for those years, 25.8823492 percent was included in the gross income shown in those returns. The returns disclosed the name of each subscriber and the percentage of his interest in the net income. Attached to each return was a statement that the return was for the purpose of putting the Government on notice concerning the operations of the syndicate.

The Commissioner increased the net income of the petitioner as reported on form 1041 for the year 1933 by the amount of $50,378.02 and explained that the increase "represents interest on $1,117,320.67 made from November 26, 1932 to November 26, 1933 which was paid to Allied Owners Corporation and is considered as a distribution to a member of the syndicate, the New York Investors, Inc. and not as an ordinary and necessary expense of operation." The Commissioner treated the petitioner as having reported no net income for 1934 and included in its net income for that year $69,970.34.

The petitioner, during the years 1933 and 1934, owned an undivided interest in the note of July 1932 of 25.8823492 percent and was entitled to receive only that percentage of the interest on the note. Neither the petitioner nor Investors ever held the note of July 1932.

The facts contained in the stipulation and accompanying exhibits not set out above are incorporated herein by this reference.

OPINION.

MURDOCK: The first and principal question is whether or not the petitioner was the owner of the entire Ringling note and, therefore, was required to report all of the interest on that note, or whether it owned only an undivided interest of 25.8823492 percent and, therefore, was not entitled to receive and was not required to report the interest on the remainder of the note, which amounted for those years ot $50,378.02. The Commissioner's theory has been that Investors was a participant in the syndicate and the entire note was owned by the syndicate, since Allied was merely acting for Investors. The evidence clearly shows that the Commissioner has been in error in so far as ownership of the note is concerned. The agreements provided that Investors should be a participant in the syndicate. Investors apparently continued as a participant in the syndicate until 1937 and received some compensation for its services as manager and for assuming the liability which it originally assumed. The question here turns upon how much of the note the syndicate owned and not upon who were participants in the syndicate. Investors never acquired any interest in the note as a member of the syndicate or otherwise. Investors was liable on the original note as an endorser, but it never was called upon to make good on that endorsement and it never acquired any rights of ownership in that note. The note was purchased by Allied for cash and then Allied sold an undivided 25.8823492 percent to the syndicate for cash. That is the only interest in the note which the syndicate ever acquired and it was entitled to receive and did receive only the interest on that portion of the note. Our findings completely dispose of this issue.

Sections 291 of the Revenue Acts of 1932 and 1934 provide:

In the case of any failure to make and file a return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, 25 per centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to willful neglect no such addition shall be made to the tax.

Other parts of the acts provide that an association shall be taxed as a corporation and every corporation subject to tax shall make a return stating the items of its gross income and the deductions and credits allowed. Regulations of the Commissioner require that the return of a corporation shall be on form 1120, but permit the use of 1041 by fiduciaries. The petitioner now concedes that it was an association taxable as a corporation, even though the term "partnership" in the act is defined as including a syndicate and a partnership is not a tax-paying entity. Returns on the form prescribed for corporations were not filed for the taxable years on behalf of the petitioner. It filed for each year a "Fiduciary return of income" for the purpose of supplying information rather than to show that tax was due. No computation of the tax was made on those returns. No contention is made that the returns were not timely filed. The Commissioner contends that the returns filed were not the returns required by statute and do not save the petitioner from the penalties of section 291.

One of the arguments of the Commissioner is that the returns did not include the interest of $50,378.02 which is the item involved in the first issue. This argument of the Commissioner falls with our decision of the first issue, in which we held that the $50,378.02 was not income of the petitioner. The Commissioner also mentions several other items, no one of which is in excess of $23. Obviously they are too insignificant to require discussion. Therefore we conclude that the returns contained sufficient information, and the remaining question is whether the fact that they were on incorrect forms is reason to apply the penalty of section 291. The case of , is directly in point. It holds that a penalty should not be imposed upon a taxpayer under a provision like that contained in section 291, where the taxpayer acted in good faith and gave complete information, even though he selected the wrong form. The question of the running of the statute of limitations under sections 275(c) of the Revenue Acts of 1928 and 1932, which use the words "no return of the tax imposed by this title," is a different question from the one here involved. Cf. , dismissed for lack of jurisdiction, ; . We hold on authority of Hartford, that there was not during these years a failure to make and file a return within the meaning of section 291.

Decision will be entered under Rule 50.