Sunset Scavenger Co. v. Commissioner , 31 B.T.A. 758 ( 1934 )

SUNSET SCAVENGER COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Sunset Scavenger Co. v. Commissioner

Docket Nos. 54841, 54842, 60574.

United States Board of Tax Appeals

31 B.T.A. 758; 1934 BTA LEXIS 1040;

November 27, 1934, Promulgated

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1. EXEMPTION FROM TAX - COOPERATIVE ASSOCIATIONS. - Petitioner, a California corporation engaged in furnishing scavenger service, whose income consists of collections made from individuals and business houses for such service, together with proceeds of sales of junk collected in its operation, held not entitled to exemption from income tax as a cooperative association under sections 231(12) of the Revenue Act of 1926 and 103(12) of the Revenue Act of 1928.

2. DEDUCTIONS - EXPENSES. - Certain expenditures by petitioner during 1927 and 1929 in the printing of circulars, newspaper advertising, and employment of speakers to address civic organizations and public gatherings to argue the propriety of the enactment of certain proposed ordinances which were calculated to greatly damage its business, held to have been legitimate and legal expenditures to protect petitioner's business and as such to represent ordinary and necessary expenses, deductible in computing net income.

James C. Espey, Esq., S. F. Racine, C.P.A., and H. F. Baker, C.P.A., for the petitioner.

E. A. Tonjes, Esq., H. D. Thomas, Esq., and Dean P. Kimball, Esq., for the respondent.

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LEECH

These appeals, consolidated for hearing and decision, seek redetermination of deficiencies of $8,880.55, $4,305.84, and $9,270.19 asserted by respondent for the calendar years 1927, 1928, and 1929, respectively.

The errors assigned are: (a) the refusal of respondent to grant petitioner exemption from Federal income tax as a so-called "cooperative" under sections 231 of the Revenue Act of 1926 and 103 of the Revenue Act of 1928, with the alternative assignment that, in the event exemption is denied, then the sections in question are unconstitutional; (b) respondent's allowance of insufficient amounts in the several years as deductions for personal services rendered by officers and members of petitioner; (c) the disallowance by respondent as "lobbying" expenses of certain items claimed by petitioner as ordinary and necessary business expenses.

FINDINGS OF FACT.

Petitioner is a California corporation, organized in 1920. The purpose of its organization and its activities since its incorporation have been the rendering of service to individuals and business houses in the collection and disposal of their garbage. It operates under a general charter, with wide powers as to the kinds of business it may carry on, but has in fact done no business except that of scavenger. Petitioner's organization was due to conditions existing prior to 1919. At that time the collection of garbage in the San Francisco Bay region was by individuals. A man owning a wagon or truck would employ one or more helpers and build up a "route." Under this system there was competition and individual routes and districts overlapped. To avoid this there was organized by the individuals in 1919 an association or partnership. The routes were all fixed by the association, costs reduced, and the profits, thus increased, were divided upon some equitable basis among the members.

Soon, however, dissension arose. Certain of the members taken into the association were indifferent scavengers, with little natural aptitude for garbage collection. They were the type which merely dumps the can and drives on ignorant of the fact that a little time spent showing courtesies to the housewife creates for the garbage man a personality or good will which is reflected in added business. Through the operation of the association these less capable scavengers were brought into contact with the really expert type and through these contacts were instructed in the finer technique of the work. Some of these men, however, after thus acquiring proficiency, began withdrawing from the association, taking their equipment, newly acquired training and good will, and began operating as independents, able to offer much more serious competition than before. The association then sought legal advice and was told that its remedy lay in the organization of a corporation to which each member of the association would convey his entire outfit in return for stock. The corporation would then own all the property and if a member attempted to withdraw he could not take his former equipment and no matter how efficient a scavenger he might be personally, he could not, with empty hands, offer acceptable scavenger service to the householder or serious competition to the corporation.

The petitioner corporation was then formed. The equipment of each of the former members of the association was appraised. The one with the highest appraised value was transferred to the corporation in exchange for 100 shares of its stock. The less valuable outfits, with an amount in cash in each case sufficient to bring its value up to that of the first outfit, were transferred by the individual owners for 100 shares of stock in each case. Later the stock of each member was reduced to 50 shares.

Additional equipment was purchased by the corporation and sufficient assigned to each route or district to serve its needs. All of the members rendered service as in the past. One member was employed as forman in charge of each route. Other members might work with him on the truck and in addition nonmember "helpers" were employed at $5.50 per day. The actual work of garbage collection began at 4:30 a.m. and ceased about 4:30 p.m., at which time the "helper's" work was over. The members, however, although doing similar work to the helpers during the day, had the additional work of keeping the route book of customers and making collections of the charges for service. This was done in the late afternoon and early evening, usually being completed about 8 p.m. The members also took care of the horses, wagons, and trucks they used.

From its organization and during the years here involved the corporation kept few records and its method of paying its expenses and distributing the proceeds of its business were quite simple. A meeting of all members or stockholders was held twice a month. To this meeting each member brought his route book showing all collections made for service or for sale of junk, paper, bottles, etc. Against this total he had taken credit for payments made by him to his helpers and for feed, gasoline, oil, etc. Each member passed his book to his neighbor for check and audit and when each account was approved the individual member paid onto the table the amount shown to be due from him. The president of the corporation then took from the aggregate the sum estimated to be necessary for general corporate expense for the next two weeks and the balance was divided equally among all the members. The officers of the corporation had few duties and received as such no additional pay. They worked in collecting garbage as other members.

In making its returns for the years in question petitioner took deduction, as salaries and bonuses, of the amounts distributed as above described to the members. In determining the deficiencies respondent has determined that a reasonable salary for each of the approximately 175 members, for services performed, was $3,600 per year, and has increased net income reported for each year by the amount distributed in such year, as above set out, in excess of aggregate salaries in this amouvt.

In determining the deficiencies here in question respondent disallowed deductions of $42,932.30 and $1,600 taken by petitioner for 1927 and 1929, respectively, as business expenses. The parties stipulated at the hearing that of the first mentioned sum $4,223.47 was properly allowable and $4,223.48 not allowable as a deduction. The facts with respect to the balance of the first mentioned sum or $34,485.35 and the item of $1,600 are, that in 1927 a municipal ordinance was proposed for enactment providing that a scavenger license should be issued to any individual who procured the written request of 20 percent of the householders in the area to be served. This promised considerable interference and loss of income to petitioner. Together with another scavenger association in the same territory and similarly affected, it formed an organization to oppose the ordinance. To this organization petitioner contributed $34,485.35 during 1927. This was expended during that year in printing and distributing pamphlets discussing the ordinance and arguing the maintenance of the then present system, in newspaper advertising to the same effect and employment of speakers. The latter appeared before various clubs and civic organizations and argued the desirability of continued garbage collection by those then engaged on the work, as trained and competent scavengers, rather than using new and untrained men. In 1929 an ordinance was proposed providing for municipal garbage collection. This would have destroyed petitioner's business. Petitioner argued against the advisability of the proposed enactment through the medium of newspaper advertisements, pamphlets distributed, and radio talks by paid individuals. In this work it expended $1,600 in that year.

OPINION.

LEECH: Under its first assignment petitioner contends that it is exempt from income tax under sections 231(12) of the 1926 Revenue Act and 103(12) of the 1928 Revenue Act, which provide:

The following organizations shall be exempt from taxation under this title:

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(12) Farmers', fruit growers', or like associations organized and operated on a cooperative basis (a) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (b) for the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses. * * *

Despite the very extensive argument of petitioner's counsel on brief to convince us that waste paper, junk, garbage in place, and labor constitute "products" of the stockholders or members of petitioner, which are merely "marketed" by the latter, we cannot agree with his contention that petitioner is similar in all essential respects to a cooperative agricultural marketing association which sells for its members the fruits or vegetables produced by them and delivered to it for sale, remitting to them the proceeds less the cost of selling. We cannot see in the wording of the quoted sections any indication whatsoever on the part of Congress to grant tax immunity to a corporation organized and operating in the manner of this petitioner. In , in construing section 231(11) of the 1921 Act, which is in all essential respects similar to the sections here involved, we said:

The plain intention of Congress was to grant certain benefits to groups of producers organized to sell their own crops or other products through cooperative sales agencies, or to purchase supplies and equipment for the use of members in their activities as producers.

Petitioner is not marketing products of its members. Its income represents the payments made to it by the public for service it renders and the proceeds of sales of its own property, consisting of junk and waste paper which it collects in its operations. The service rendered is by the corporation with equipment which it owns and labor which it employs.

This brings us to petitioner's alternative assignment of error that if exemption be denied then the sections of the act above quoted are unconstitutional, as class legislation. We are warned by counsel that a failure to correctly decide this question "would be nothing short of catastrophic." We do not shrink from assuming necessary responsibilities, but in view of the fact that the question of the constitutionality of the quoted sections is immaterial to one to whom such sections, as we have held, have no application, we prefer to postpone consideration of that question to such time as we have a controversy in which it is pertinent to an issue presented.

The second issue is upon the allowance by respondent of $3,600 as a reasonable salary for each of the members, in computing petitioner's deduction for expense of operation. Petitioner contends that $3,800 is the proper allowance on the basis of a reasonable daily wage of approximately $16. In view of the testimony that the members were often absent from sickness and at times as many as 25 would not be at work, the allowance by respondent of a flat amount of $3,600 for each is, in our opinion, not inadequate, even upon the daily wage basis contended for by petitioner.

The remaining issue is the allowability as regular and necessary business expenses of expenditures by petitioner of $34,485.35 in 1927 and $1,600 in 1929. The circumstances with respect to each expenditure are substantially the same. In each of those years ordinances were proposed for enactment which might reasonably be expected to injure greatly petitioner's business. The expenditures in question were for printing and distributing pamphlets, newspaper advertising, and the hire of speakers to argue advisability of the proposed changes in the law. The expenditures were disallowed by respondent as representing cost of "lobbying", but the record shows to our satisfaction that none of the expenditures were for lobbying in the sense of something sinister as opposed to the public welfare. It is true that the purpose of the expenditures was to avert the enactment of legislation unfavorable to petitioner and calculated to damage its business, but the means used, argument addressed to the public, were legitimate. There is no intimation that the expenditures were for illegal purposes such as buying votes or influencing acts of public officials. In , we held that expenditures made in appealing to the public for the purpose of creating a sentiment favorable to the taxpayer and thus averting the enactment of damaging legislation were reasonable and necessary. We can see in these expenditures by petitioner merely the cost of legitimate efforts made to protect its property and business. Such cost is an ordinary and necessary expense of business. ; , affd., ; ; .

Judgment will be entered under Rule 50.