M. B. Austin Co. v. Commissioner ( 1928 )

M. B. AUSTIN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

M. B. Austin Co. v. Commissioner

Docket No. 14883.

United States Board of Tax Appeals

13 B.T.A. 867; 1928 BTA LEXIS 3174;

October 9, 1928, Promulgated

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">*3174 Held, that the principal stockholders of the petitioner corporation were also partners in a partnership operating under the name of M. B. Austin & Co., and that respondent erred in consolidating into one return the net income of both the partnership and corporation for the year 1919.

M. Manning Marcus, Esq., for the petitioner.

Paul L. Peyton, Esq., and Hugh Brewster, Esq., for the respondent.

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GREEN

">*867 In this proceeding the petitioner seeks a redetermination of its income and profits-tax liability for the calendar year 1919, for which the respondent determined a deficiency of $16,696.68. The entire deficiency is in controversy. The petitioner alleges that the respondent erred in including in its net income an amount of $46,896.45 representing the net income of a partnership known as M. B. Austin & Co. Should it fail in this allegation it further alleges as alternatives that it is entitled either to have its profits taxes computed in accordance with section 303 (partly personal service and partly capital) of the Revenue Act of 1918, or that it is entitled to further relief under the special assessment provisions (sections 327 and">*3175 328) of the same Act.

FINDINGS OF FACT.

The petitioner is an Illinois corporation with its principal office at Chicago. It was incorporated in 1902 for the purpose of taking over that part of the business of a partnership which required the investment of capital. The partnership had been organized in 1898 by ">*868 Merritt B. Austin and William A. Browne and had operated under the name of M. B. Austin & Co. Prior to 1898 Austin had conducted an agency business as an individual selling electrical supplies on a commission basis, which business grew to such proportions that in 1898 he took into partnership with him the said Browne.

Beginning in 1894 Austin had entered into contracts with various concerns manufacturing electrical supplies to represent them and sell their goods on a strictly commission basis. The rendition of such services required practically no capital other than was necessary for ordinary office expenses. Later, however, opportunities arose to do a trading and manufacturing business in connection with the agency business. The trading and manufacturing business required the use of capital. The partners decided that it would be advisable to incorporate">*3176 that part of the business which required the use of capital, and whereupon, on May 15, 1902, the petitioner herein was incorporated. On May 31, 1902, the two partners, Austin and Browne, executed a bill of sale in which they "granted, bargained, sold, and delivered" to the corporation -

* * * All the following Goods, Chattels, and Property, to-wit:

All and singular the stock, merchandise, fixtures, assets, good will, credit, name, and effects of the going business conducted under the name of M. B. Austin and Company (co-partnership consisting of the said Merritt B. Austin and William A. Browne) located in Chicago, Cook County, Illinois, including the machinery, heavy and small tools, plant, equipment, manufactured and raw materials, contracts, furniture, supplies, accounts, and bills receivable, lease hold interest to the premises known as 56 and 58 West Van Buren Street in said city, together with everything else contained in said premises and in separate warehouses, and in factories, and in transit to or from said place of business, meaning hereby to cover and include all goods, chattels, property, choses in action, good will, credit, name and all other assets pertaining to">*3177 or a part of all of the going business run by said grantors under the name and style of M. B. Austin and Company of Chicago, Illinois.

It is understood and agreed that the party of the second part assumes absolutely and agrees to pay all outstanding accounts and bills payable of the old firm charged or to be charged against the said copartnership.

Notwithstanding the bill of sale which was executed on May 31, 1902, the corporation did not then or thereafter acquire the sales agency commission contracts which had been acquired personally by Austin himself.

The name of the corporation was originally M. B. Austin & Co. In 1918 it was changed to The M. B. Austin Co.

The original stockholders of the petitioner were Austin, Browne, and one Peter Taylor. Shortly after incorporation, three others acquired some of petitioner's stock but held it for only a few years after which time it was repurchased by the petitioner. In 1918 one A. H. Friend, an employee of the petitioner, was given 25 shares of ">*869 stock by the petitioner, together with the privilege of buying an additional 25 shares at par value. During 1919 the stockholders were as follows:

	Shares
Austin	1,000
Browne	700
Taylor	250
Friend	50
Total	2,000

">*3178 The partnership of M. B. Austin & Co., consisting of Austin and Browne, continued to exist after the petitioner was incorporated. Shortly after incorporation Taylor was given a one-eighth interest in the partnership. During 1919 the interests in the partnership of M. B. Austin & Co. were as follows:

	Per cent
Austin	52 1/2
Browne	35
Taylor	12 1/2
Total	100

From 1902 until 1918 the partnership and corporation kept their records in the same set of books. In the spring of 1918, at the time the petitioner's name was changed, separate sets of books were opened for the partnership and for the corporation.

On December 1, 1919, the three partners drew up and executed a copartnership agreement a part of which is quoted as follows:

This Memorandum of Agreement, Made in Triplicate this first day of December 1919 by and between Merritt B. Austin and William A. Browne, of Chicago, and Peter Taylor of California,

WITNESSETH:

This Memorandum is intended to confirm the original and former understanding between the parties hereto to the end that there shall be a written record of the agreement under which they have been and are working.

The Parties hereto">*3179 are a partnership, with headquarters in Chicago, engaged in the Business of Sales agents for Manufacturers, under the name of M. B. Austin & Company. They have no invested capital. They have arranged with The M. B. Austin Company to conduct the office Records detail and clerical work of this agency business for which The M. B. Austin Company is remunerated as follows:

* * *

It has been and still is Mutually understood and agreed between the parties hereto that the net profits arising annually out of this sales agency copartnership shall be divided as follows:

To Merritt B. Austin	21/40
To William A. Browne	14/40
To Peter Taylor	5/40

">*870 On March 11, 1920, the partnership filed a partnership income-tax return on Form 1065 for the calendar year 1919 in which it reported a net income of $46,896.45 which was allocated among the three partners in Schedule C of the return in the proportion set out above. On the same day the M. B. Austin Co. filed a corporation income and profits-tax return on Form 1120 for the calendar year 1919, and reported a net income of $44,984.70 and an invested capital of $174,269.18. In determining the deficiency the respondent">*3180 added together the net income of the corporation and that of the partnership, thereby obtaining an alleged net income of the petitioner of $91,881.15 and computed the profits tax under section 328 of the Revenue Act of 1918.

The net income of the petitioner for the calendar year 1919 was $44,984.70. The balance of the amount $91,881.15 determined by the respondent to be the petitioner's net income, being the amount of $46,896.45, was not the income of the petitioner but was the income of the partnership of M. B. Austin Co.

OPINION.

GREEN: The principal question in this proceeding is whether the majority stockholders of the petitioner continued to operate as a partnership after the petitioner was organized. The evidence is uncontradicted that they did. Both Austin and Browne testified that the only purpose of forming the corporation was to take over that part of the business which required the use of capital and that at no time did the corporation acquire the sales agency commission contracts. They further testified that the partnership in question had existed from the year 1898 and was still in existence during 1919. The agreement of copartnership executed on December 1, 1919, corroborates">*3181 such testimony. The respondent was, therefore, in error in consolidating the net income of the partnership and corporation into one return. The deficiency should be redetermined by excluding from the net income of $91,881.15, determined by the respondent, the amount of $46,896.45.

In view of the foregoing it does not become necessary to consider the two alternatives.

Judgment will be entered under Rule 50.