Coca-Cola Bottling Co. v. Commissioner , 22 B.T.A. 686 ( 1931 )

COCA-COLA BOTTLING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

SIDNEY W. SOUERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

JAMES P. BUTLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ALFRED B. FREEMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

F. E. GUNTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Coca-Cola Bottling Co. v. Commissioner

Docket Nos. 27180, 27181, 27624, 27307, 31406-31409, 31550.

United States Board of Tax Appeals

22 B.T.A. 686; 1931 BTA LEXIS 2084;

March 11, 1931, Promulgated

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1. Assessment and collection of the deficiency from the transferees are not barred.

2. A petitioner appealing to the Board under section 280 of the Revenue Act of 1926, can not attack the constitutionality of that section. Henry Capellini,14 B.T.A. 1269">14 B.T.A. 1269.

3. The Board will raise a question of jurisdiction of its own volition. Martha M. Hanify et al.,21 B.T.A. 379">21 B.T.A. 379.

4. A stockholder of a dissolved corporation has no authority, merely by reason of such relationship, to represent the corporation, and any determination of the Board upon an appeal instituted by such a stockholder would be a nullity. Under such circumstances the Board, of its own motion, will decline to take jurisdiction. S. Hirsch Distilling Co.,14 B.T.A. 1073">14 B.T.A. 1073.

5. The mere allegation that section 280 of the Revenue Act of 1926 is unconstitutional in so far as it purports to authorize the assessment and collection of a penalty assessed against a taxpayer corporation from transferees of its assets, does not raise an issue of law. The specific constitutional provision alleged to be violated must be pleaded. Frederick N. Dillon,20 B.T.A. 690">20 B.T.A. 690.

6. A penalty is an "addition to the tax" and under section 280 of the Revenue Act of 1926, a transferee may be held liable for its payment.

7. Books of account are not conclusive evidence of the value of corporate assets, Doyle v. Mitchell,247 U.S. 179">247 U.S. 179.

8. March 1, 1913, value of Coca-Cola franchise determined.

John J. Finnorn, Esq., for the petitioners.

R. W. Wilson, Esq., for the respondent.

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LOVE

These proceedings, which have been consolidated for hearing and decision, may be grouped in three classes for purposes of description. They are as follows:

1. Appeal of the Coca-Cola Bottling Company, Docket No. 31409. This proceeding is for the redetermination of a deficiency in income tax for the period January 1, to April 30, 1925, in the amount of $10,578.55, plus a penalty in the amount of $2,644.64.

Petitioner alleges error in the respondent's reduction of the March 1, 1913, value of a Coca-Cola bottling franchise, from $89,536.96 to $7,870, and the consequent inclusion of the difference between those sums in a profit derived on the sale of the said franchise during the taxable period involved.

2. The proceedings of Sidney W. Souers, James P. Butler, F. E. Gunter, and Alfred B. Freeman, Docket Nos. 27180, 27181, 27264, and 27307, respectively, involve in each instance a deficiency in the amount of $780.89, asserted as a liability of petitioner as a transferee of assets of the Coca-Cola Bottling Company, for unpaid income and profits tax of that company for the year 1921.

The errors alleged by petitioners are:

(a) Assessment and collection of the tax is barred by the statute of limitations.

(b) The respondent erred in reducing invested capital of the Coca-Cola Bottling Company by the amount of $42,549.42, representing, according to the deficiency letter, depreciation of a franchise.

(c) The respondent erred in reducing invested capital by the amount of $16,530.04, under the provisions of section 326(a)(5) of the Revenue Act of 1921, which prescribes a 25 per cent limitation on the inclusion of intangibles in invested capital.

The proceedings of F. E. Gunter and Alfred B. Freeman, Docket Nos. 27264 and 27307, respectively, allege in addition, that section 280 of the Revenue Act of 1926 is unconstitutional in that (1) it delegates to the executive department, powers, duties, and functions that are purely and strictly judicial in nature, and it is thereby violative of the third article of the Constitution; (2) it deprives petitioner of a trial by jury in an action at law where the amount in controversy is in excess of $20, thereby contravening the provisions of the Seventh Amendment; (3) it deprives petitioners of property without due process of law, and is, therefore, contrary to the Fifth Amendment; (4) it imposes a direct tax without apportionment according to population, and thereby violates section 9 of Article I of the Constitution.

Upon hearing and brief, petitioners have abandoned the allegations of error designated above as (b) and (c).

3. The proceedings of Sidney W. Souers, James P. Butler, F. E. Gunter, and Alfred B. Freeman, Docket Nos. 31406, 31407, 31550, and 31408, respectively involve in each instance a deficiency in the amount of $13,289.80 asserted as a liability of the petitioner as a transferee of assets of the Coca-Cola Bottling Company, for unpaid income tax and penalties of the said company for periods as follows:

Period	Tax	Penalty	Deficiency
Year 1922	$66.61		$66.61
Jan. 1 to April 30, 1925	10,578.55	$2,644.64	13,223.19
Total			13,289.80

The errors alleged by petitioners are:

(a) That section 280 of the Revenue Act of 1926 is unconstitutional because (1) it is "arbitrary and capricious" and deprives petitioner of due process of law; (2) it levies a direct tax without apportionment according to the enumeration or census directed to be taken by the Constitution, thereby violating section 9, Article I of the Constitution, and that it does not impose the said tax under authority of the Sixteenth Amendment to the Constitution; (3) it delegates to the executive department, powers, functions, and duties which are purely judicial in character, and that the said section is, therefore, beyond the powers of the Congress to enact; (4) it deprives petitioner of the right of trial by jury in an action at law in which the amount in controversy exceeds $20, and it is, therefore, in contravention of the Seventh Amendment to the Constitution.

(b) That section 280 of the Revenue Act of 1926 does not authorize the "imposition and assessment" of a penalty for delinquency in filing a return against a transferee, or if it does authorize such action, then the said section is unconstitutional.

(c) The respondent erred in reducing the March 1, 1913, value of a Coca-Cola bottling franchise from $89,536.96 to $7,870, and the consequent inclusion of the difference between these sums, amounting to $81,666.96, in a profit derived by the Coca-Cola Bottling Company on the sale of the said franchise during the taxable period January 1 to April 30, 1925.

The adjustment of income of the Coca-Cola Bottling Company which resulted in the deficiency of $66.61 for the year 1922, resulted from the disallowance of a claimed deduction for salesmen's expenses. The respondent's denial of that deduction is not assigned as error in these proceedings.

FINDINGS OF FACT.

The Coca-Cola Bottling Company, a corporation duly organized, formerly existing and voluntarily dissolved pursuant to the laws of the State of Illinois, had its principal office during the tenure of its business at Chicago. The Coca-Cola Bottling Company in this proceeding appears through Alfred B. Freeman, president of the Coca-Cola Bottling Company of Chicago, and individually a member of a syndicate composed of Alfred B. Freeman, James P. Butler, Sidney W. Souers and F. E. Gunter, which syndicate constituted the principal stockholders of the said company at the date of its liquidation and final and complete dissolution during the calendar year 1925.

Sidney W. Souers, James P. Butler and Alfred B. Freeman are residents of New Orleans, La. F. E. Gunter is a resident of St. Louis, Mo.

The Coca-Cola Bottling Company, hereafter termed the Illinois Company, was incorporated in 1906. Its initial authorized capital stock was in the amount of $30,000, represented by 300 shares of $100 par value. By successive amendments its authorized capital was increased to $200,000, represented by 20,000 shares of $10 par value, and at the time of its dissolution in 1925, 12,184 such shares were issued and outstanding.

Under date of January 3, 1906, the Illinois Company obtained a franchise from the Western Coca-Cola Bottling Company. This franchise was what is known as a "first line" franchise, its material provisions reading as follows:

CONTRACT.

This contract made this 3rd day of January, 1906, by and between the Western Coca-Cola Bottling Company, a corporation organized under the laws of the State of Illinois, party of the first part, and the Chicago Coca-Cola Bottling Company, Chicago, Illinois, party of the second part, Witnesseth:

Whereas, said party of the first part has secured from The Coca-Cola Bottling Company, a corporation of Chattanooga, Tenn., and operating a charter under the laws of Tennessee, the sole and exclusive right to bottle and sell bottled Coca-Cola in certain territory of the United States including the State of Illinois, said original right having been by said Coca-Cola Bottling Company aforesaid, obtained from The Coca-Cola Company, a corporation of Atlanta, Georgia, chartered under the laws of Georgia, and,

Whereas, the Coca-Cola Bottling Company is desirous of securing of the Western Coca-Cola Bottling Company, the aforesaid sole and exclusive right in and to the following territory, to-wit: The City of Chicago and fifty miles therefrom in all directions in the State of Illinois. Now, therefore, it is agreed by and between said parties as follows:

1. The said party of the first part agrees to lease and set over to and hereby does lease and set over to the party of the second part, the sole and exclusive right to bottle and sell bottled Coca-Cola in the aforesaid territory; the sole and exclusive right to use the name Coca-Cola and all the trade-marks and designs now owned or controlled by the party of the first part in the said territory, upon any bottles or other receptacles containing the bottled mixture hereinafter described. * * *

* * *

3. The said party of the second part agrees to begin bottling by the first day of , 1906.

4. It is further understood that said second party shall buy of the Western Coca-Cola Bottling Company all the syrup required or used by it in the preparation for market of the bottled goods aforesaid, * * *

5. It is further agreed that said secod party shall increase the investment in said plant and in said business as the demand for bottled goods in said territory may justify, and shall not transfer this contract without the written consent of the party of the first part.

* * *

7. It is further expressly agreed, that if the second party shall fail at any time to purchase of said party, as aforesaid, all the Coca-Cola syrup required or used by it in the conduct of its business, or shall fail to begin to bottle Coca-Cola at the time specified, or fail to bottle said goods in the manner hereinbefore provided, or shall fail to comply with any other of the requirements or provisions of this contract, first party shall have the right to declare this contract forfeited, and to resume possession of the aforesaid territory in as full and complete a manner as if such contract had never been made.

8. It is further agreed that said first party shall furnish to said second party with every gallon of Coca-Cola syrup purchased, as aforesaid, ten cents worth of advertising matter, such as the first party may have on hand or be able to obtain from The Coca-Cola Company. The said second party to have the right to specify the kind of advertising matter wanted, subject to the ability of the party of the first part to obtain the particular kind of the said Coca-Cola Company, and said second party agrees to pay for all advertising matter he may use in excess of ten cents per gallon, allowed on January 1st, of each year.

9. It is further agreed that so long as the said second party shall comply with the terms of this contract, the rights, privileges and immunities hereby granted to said second party, shall remain in full force and effect.

Witness our hands this day and year above written.

(Signed) WESTERN COCA-COLA BOTTLING COMPANY,

By S. L. WHITTEN,

Secy. & Treas.

CHICAGO COCA-COLA BOTTLING COMPANY,

By M. H. SKALOWSKI,

Prest. & Gen. Mgr.

The Coca-Cola Bottling Company consents to the within contract being made by the Western Coca-Cola Bottling Company with the Chicago Coca-Cola Bottling Co., but does not thereby become a party to the said contract.

(Signed) THE COCA-COLA BOTTLING CO.,

By J. B. WHITEHEAD,

Secy. & Treas.

The Coca-Cola Co. consents to the making of the within contract, giving to the Chicago Coca-Cola Bottling Co. the territory herein by the Western Coca-Cola Bottling Co. subject to all its conditions with the original contract with The Coca-Cola Bottling Co. but does not thereby become bound by any of the terms of this contract other than as it is bound by its contract with The Coca-Cola Bottling Company, nor is not to be considered a party to the within contract.

(Signed) THE COCA-COLA CO.,

A. G. CANDLER, Pt.

The corporation referred to in the franchise as the "Chicago Coca-Cola Bottling Company" is the Coca-Cola Bottling Company, petitioner in these proceedings and herein referred to as the Illinois Company.

The franchise was originally entered on the books of the Illinois Company at $7,870, which represented its cost. By entries prior to 1913, the cost was increased to $89,536.96, at which figure it stood on and before March 1, 1913. The original books of entry can not be located, but the report of a revenue agent for 1917 referred to the following entries, said to have been located by him, as an explanation of the increases:

Capital stock distributed to stockholders	1908	$42,500.00
Capital stock issued for services	1910	2,000.00
Registration fee - capital stock	1910	75.00
Deficit (1906-1909) capitalized		14,406.66
Expense of selling capital stock	47.04
Increase in capital stock to amount outstanding		49.42
Stock issued for services	1912	10.00
Balance of $76,050 of stock issued in 1912 for promotion		22,578.84
Total		81,666.96
Original cost		7,870.00
Book value at March 1, 1913		89,536.96

Balance sheets of the Illinois Company as of January 1, 1910, and January 1, 1911, were as follows:

	As of January 1, 1910	As of January 1, 1911
ASSETS
Bottles	$17,021.27	$20,722.91
Chicago franchise	64,774.16	66,898.70
City cases	8,017.97	6,123.89
Furniture and fixtures	8,017.97	6,123.89
Gas Drums		280.00
Live stock	2,433.00	3,615.50
Machinery and tools	4,562.00	4,672.83
Shipping cases		3,252.53
Syphons		430.00
Wagons and harness	2,141.02	2,448.02
Merchandise on hand	1,084.20	2,505.00
E. L. Parr	43.48	552.77
H. Newsome		40.00
G. H. Rankin		25.00
Western Coca-Cola Bottling Co	661.30	678.38
Bills receivable		1,463.32
Accounts receivable	1,525.96	1,948.95
Cash	209.00	187.68
Total	116,536.26
LIABILITIES
J. N. Webb	13.64	972.34
Webb and Crawford	57.76	1,006.22
E. Goldman & Co	57.76
F. Gutman & Co		95.68
Special stockholders' loans	(A)19,000.00
Bills payable	10,250.00
Accrued interest	929.46
Imperial Copper Co		230.00
Spanish Cork & Stopper Co		30.60
Western Coca-Cola Bottling Co		85.31
Capital stock	75,500.00	111,711.28
Surplus		2,404.83
Arbuckle Brothers	52.23
Total	102,803.09	116,536.26

Balance sheets for other years from 1906 to 1919 can not be located.

During the years 1910, 1911, and 1912 the Illinois Company made 79 separate sales of its capital stock, aggregating 1.395 shares at prices ranging from $10 to $22.50 per share, and averaging about $14.65 per share. The last two of these sales were sales of 50 shares at $16 per share on July 5, 1911, and 500 shares at $10 per share on September 25, 1912. These stock sales are the only ones of which records can now be located. All but three of the purchasers were residents of Georgia, two were residents of Chicago, and the other a resident of Florida.

Available records show the following earnings, and salaries paid to officers, exclusive of employees, for the years indicated:

Year	Earnings	Officers' salaries
1918	$20,953.66	Not shown.
1919	21,914.34	$15,889.00
1920	11,724.00	36,386.00
1921	14,031.00	26,300.00
1922	$7,377.00	$26,000.00
1923	12,517.00	26,000.00
1924	22,469.00	26,000.00

A statement of earnings for the year 1917 is not available, but the company's minute book shows a dividend of 10 per cent declared from such earnings. Such a dividend on the stock then outstanding would have required $12,179.

In 1925, Alfred B. Freeman, James P. Butler, F. E. Gunter, and Sydney W. Souers, petitioners in these proceedings, organized a syndicate to purchase the then outstanding stock of the Illinois Company. They purchased 10,781 shares out of a total of 12,184 shares then outstanding, for which they paid an aggregate price of $252,649, which averages $23.435 per share. The members of the syndicate then caused the organization of a Louisiana corporation known as the Coca-Cola Bottling Company of Chicago, hereafter termed the Chicago Company. The Chicago Company then purchased from the Illinois Company the entire assets of the latter, paying therefor $164,207.77 in cash, and assuming all debts as shown on the books at April 30, 1925, the aggregate payment and obligations amounting to $285,280.43. The Illinois Company was then dissolved.

After the transfer of its assets, as above detailed, the Illinois Company was liquidated with the payment of a liquidating dividend of $13.477 per share to each stockholder of record. The members of the syndicate above mentioned received the following amounts in the said liquidation:

Alfred B. Freeman	$37,844.71
James P. Butler	35,283.60
F. E. Gunter	35,283.60
Sydney W. Souers	35,283.60
	143,695.51

It was stipulated, however, that the four syndicate members received an aggregate amount of $143,837.26 in liquidating dividends. The cause of the divergence between this figure and the total stated above does not appear.

Prior to 1900 the Coca-Cola Company, a Georgia corporation with headquarters at Atlanta, hereafter referred to as the parent company, was engaged in the manufacture of Coca-Cola syrup under a secret formula. The parent company was the exclusive manufacturer of Coca-Cola syrup and it had copyrighted certain designs, a trademark and the name "Coca-Cola." The syrup was then marketed to the public only in drinks prepared at fountains.

In 1900, or shortly prior thereto, the parent company entered into a certain contract with two men named Whitehead and Thomas, who were later succeeded by the Coca-Cola Bottling Company, hereafter referred to as the Whitehead Company. Under the terms of the said contract, the Whitehead Company acquired the exclusive, perpetual privilege to prepare and market bottled Coca-Cola in a very large area in the United States. With this privilege was given the right to use the trade-marks, etc., of the parent company. The validity of this contract was upheld in Coca-Cola Bottling Co. v. Coca-Cola Co.,269 Fed. 706.

Some time prior to 1906, the Whitehead Company transferred its rights in a territory involving about 13 States, including the State of Illinois, to the Western Coca-Cola Bottling Company, hereafter termed the Western Company. The Illinois Company, therefore, obtained the franchise of January 3, 1906, from the Western Company.

Alfred B. Freeman, a petitioner herein, and one of the members of the syndicate above mentioned, has been engaged in the Coca-Cola business since November 20, 1906, when he bought certain interests in the Louisiana Coca-Cola Bottling Company, New Orleans, and the Coca-Cola Bottling Company of Baton Rouge. Early in 1924 he began to investigate the Illinois Company with the view of acquiring an interest therein. The lease, the extent and population of the territory served, and the possibility of increasing the business and earnings of the company by additional capital investments, were all considered. He was informed by Morgan W. Evans, who was secretary and bookkeeper of the Illinois Company for several years prior to 1913, that the franchise had been set up on the company's books at a value of $89,536.96 prior to March 1, 1913. Mr. Evans is now dead.

The territory embraced in the franchise was the "City of Chicago and 50 miles therefrom in all directions in the State of Illinois." This included Aurora, Joliet, Waukegan, Elgin, Chicago Heights and the Great Lakes Naval Training Station. Joliet is the site of the Illinois Steel Company plant. The population and payroll closely approximate those of Birmingham, Ala. Freeman was familiar with Coca-Cola sales in Birmingham and knew they were profitable.

Coca-Cola had a national reputation in 1913. Its volume of sales had increased in every year since 1886, when the parent company was established. In 1913, the average annual sales of bottled Coca-Cola in territories where it was distributed, was approximately 10 bottles per capita. The territory embraced in the franchise of the Illinois Company then had a population of more than 2,000,000 people. The average experience of Coca-Cola bottling plants was to derive a profit of $1 per gallon on Coca-Cola syrup. Considering the population of the territory served as 2,000,000, and the annual consumption as 10 bottles per capita, it is indicated that 166,666 gallons of syrup would be used yearly. Actual consumption of Coca-Cola syrup in the territory mentioned, does not appear.

The income and profits tax return of the Illinois Company for the calendar year 1921 was filed on March 15, 1922.

Under date of February 3, 1926, a letter, in the usual form of a deficiency letter (Form N P-2), was transmitted by registered mail to "Coca-Cola Bottling Co., 456 East 31st Street, Chicago, Illinois" (Illinois Company). This letter, which was transmitted under authority of section 274(a) of the Revenue Act of 1924, advised of the respondent's determination of a deficiency against the addressee for the calendar year 1921, in the amount of $780.89. No appeal from the said letter has ever been filed with this Board. The deficiency above mentioned was assessed against the Illinois Company on the respondent's assessment list for the 1st District of Illinois, dated May 25, 1926.

On February 25, 1927, the respondent mailed deficiency letters to Sidney W. Souers, James P. Butler, F. E. Gunter and Alfred B. Freeman, proposing in each instance, the assessment of an alleged liability as a transferee of assets of the Coca-Cola Bottling Company (Illinois Company) for unpaid income and excess-profits taxes of that company for the year 1921, in the amount of $780.89.

The Illinois Company ceased to do business, and maintained no office after its dissolution in 1925. The Chicago Company thereafter maintained the place of business formerly occupied by the Illinois Company and it received considerable mail designated to the last named concern.

A deficiency in income tax for the year 1922, in the amount of $66.61, was assessed against the Illinois Company on the respondent's List No. 1, 1st District of Illinois, dated March 1, 1927. A deficiency in income tax for the period January 1, to April 30, 1925, in the amount of $10,578.55, plus a penalty in the amount of $2,644.64, was assessed against the Illinois Company on the respondent's List No. 3, 1st District of Illinois, dated July 16, 1927.

By a deficiency letter dated August 1, 1927, addressed to "Coca-Cola Bottling Company, 456 East 31st Street, Chicago, Illinois, c/o LouisianaCoca-Cola Bottling, Canal and Robertson Streets, New Orleans, Louisiana," the respondent notified the Illinois Company of the above mentioned assessment and penalty for the period January 1, to April 30, 1925. Proceeding, Docket No. 31409, was filed as an appeal from the determination mentioned, the petition reading in part as follows:

That the Taxpayer is a corporation, duly organized, formerly existing, and voluntarily dissolved pursuant to the Laws of the State of Illinois, with its principal office, during the tenure of its business, at 456 East 31st Street, Chicago, Illinois, herein appearing through Alfred B. Freeman, President of the Coca-Cola Bottling Company of Chicago, Inc., a corporation organized and existing pursuant to the Laws of the State of Louisiana, with its principal office and place of business at 456 East 31st Street, in the City of Chicago, in the State of Illinois, and individually a member of a syndicate composed of said Alfred B. Freeman and Messrs. James P. Butler and Sidney W. Souers of the City of New Orleans and F. E. Gunter of the City of Saint Louis, in the State of Missouri, which syndicate constituted the principal stockholders of said Coca-Cola Bottling Company at the date of its liquidation and final and complete voluntary dissolution during the Calendar Year 1925.

* * *

AFFIDAVIT

STATE OF LOUISIANA,

Parish of Orleans:

BEFORE ME, the undersigned Notary Public, personally came and appeared Alfred B. Freeman, who being by me first duly sworn, deposes and says that he is President of the Coca-Cola Bottling Company of Chicago, Inc., a corporation organized and existing pursuant to the Laws of the State of Louisiana, which Corporation purchased the assets and assumed such liabilities of the Coca-Cola Bottling Company. Petitioner herein, as appeared on the books of the vendor, the said Coca-Cola Bottling Company at the date of the purchase; that he was one of the principal stockholders of said Coca-Cola Bottling Company, being a Member of a Syndicate holding the majority of the stock thereof; that he had read the above and foregoing petition and that the allegations therein contained, except such as are made on information and belief, are true and correct and that he verily believes the latter to be true.

(Signed) ALFRED B. FREEMAN.

MAX M. SCHAUMBURGER,

Attorney at Law and Notary Public,

620-1 Whitney Central Building, New Orleans, La.

Sworn to and subscribed before me, this 17th day of September, 1927.

(Signed) MAX M. SCHAUMBURGER, Notary Public.

[SEAL.]

The petition was also signed by "John J. Finnorn, Attorney for Appellant."

On August 12, 1927, the respondent mailed deficiency letters to Sidney W. Souers, James P. Butler, F. E. Gunter, and Alfred B. Freeman. In each instance these letters proposed the assessment of an alleged liability as a transferee of assets of the Coca-Cola Bottling Company (Illinois Company) for unpaid income tax and a penalty of that company for the periods and in amounts as follows:

Period	Tax	Penalty	Totals
Year 1922	$66.61		$66.61
Jan. 1, 1925, to Apr. 30, 1925	10,578.55	$2,644.64	13,289.80
Total			13,356.41

The petitioners, Souers, Butler, Gunter, and Freeman, are transferees of assets of the Coca-Cola Bottling Company and are liable as such transferees for deficiencies in tax of that company for the years involved herein.

OPINION.

LOVE: We shall first consider the four proceedings relating to the year 1921. These are the individual appeals of Souers, Butler, Gunter, and Freeman, Docket Nos. 27180, 27181, 27264, and 27307, respectively. The deficiencies involved have been asserted in each instance as a liability of the petitioner for total unpaid income and profits taxes of the Illinois Company for the year 1921, in the amount of $780.89. The adjustments giving rise to determination of the deficiency against the taxpayer, were pleaded as error, but upon hearing and brief the petitioners abandoned such allegations, the brief stating:

As to the 1921 case, the point upon which the petitioners rely is that no notice of demand was ever served upon the original taxpayer and no basis therefore exists for the assessment of any liability against the transferees, the tax being barred by limitation against the original taxpayer when the sixty-day letter was mailed to the transferees.

It may be pointed out that substantially identical 60-day letters were mailed to each of the transferees.

The 1921 return of the Illinois Company was filed on March 15, 1922. The four-year period for assessment for the year 1921, provided by section 250(d) of the Revenue Act of 1921, and by subsequent revenue acts, expired on March 15, 1926. Although the petitioners deny knowledge of receipt of a deficiency letter by that company for the year 1921, we have found that such a letter was transmitted to the company by registered mail under date of February 3, 1926, in accordance with the provisions of section 274(a) of the Revenue Act of 1924. This has been established from certified copies of the said letter and of the respondent's registered mailing list for the date mentioned. No appeal was filed and the deficiency was assessed against the company on the respondent's assessment list for the 1st District of Illinois, dated May 25, 1926.

At the time the said assessment was made and when the notices were mailed to petitioners (February 25, 1927), the Illinois Company had been dissolved and its assets had been distributed to petitioners in liquidation. It had ceased to do business and maintained no office. We have held under substantially similar facts in J. H. Johnson et al.,19 B.T.A. 840">19 B.T.A. 840, 846, that in such a situation:

* * * it was not essential that the respondent should proceed against the transferor before taking steps to collect the tax from the transferee. It is sufficient that he had proceeded against the transferee within the time prescribed by the statute therefor. Woodley Petroleum Co. et al.,16 B.T.A. 253">16 B.T.A. 253; Angier Corporation,17 B.T.A. 1376">17 B.T.A. 1376.

See United States v. Fairall, 16 Fed.(2d) 328, and John Thomson, Jr.,20 B.T.A. 1">20 B.T.A. 1.

In Kathleen O'Brien et al.,20 B.T.A. 167">20 B.T.A. 167, we considered facts strikingly parallel to those herein involved. In that case the taxpayer, Jacob Spahn had filed his return for the year 1921 on March 15, 1922. The deficiency was assessed against the taxpayer in May, 1926, although he had died August 27, 1924, and his estate was settled and the executor discharged on March 26, 1926. We, therefore, said that the petitioners' contentions are:

* * * that the period within which assessment of the 1921 tax could have been made had expired when the notice of deficiency was mailed to them on March 8, 1927, * * *

Section 280 of the Revenue Act of 1926 contains the provision with respect to the period within which assessments can be made against transferees. The pertinent portions of the section read as follows:

(b) The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows:

(1) Within one year after the expiration of the period of limitation for assessment against the taxpayer; * * *

* * *

(c) For the purposes of this section, if the taxpayer is deceased, or in the case of a corporation, has terminated its existence, the period of limitation for assessment against the taxpayer shall be the period that would be in effect had the death or termination of existence not occurred.

Jacob Spahn's return for 1921 was filed March 15, 1922. The four-year period for assessment of the taxes for that year provided by section 250(d) of the Revenue Act of 1921 and subsequent revenue acts expired March 15, 1926.

Under the provisions of Section 280 the period of limitation for assessment of the taxpayer's liability against the transferees expired March 15, 1927, one year after the expiration of the period of limitation for assessment against the taxpayer. The assessment for 1921 was not barred at the time the notice of March 8, 1927, was mailed to the transferees. See J. H. Johnson et al,19 B.T.A. 840">19 B.T.A. 840.

It follows that the respondent has proceeded against these transferees within the period provided by statute and, therefore, assessment against them is not barred. J. H. Johnson et al, supra.

The proceedings of Gunter and Freeman, Docket Nos. 27264 and 27307, respectively, present a second issue relating to the year 1922. The petitioners named have, by multiple assignments of error, attacked the constitutionality of section 280 of the Revenue Act of 1926, under the provisions of which the deficiencies here in controversy have been proposed for assessment against them. In Henry Cappellini,14 B.T.A. 1269">14 B.T.A. 1269, the Board held that a petitioner, seeking a redetermination of his liability as a transferee under the said section 280, may not question the validity of that section. That decision is controlling here. Cf. J. W. Oglesby, Jr., et al.,16 B.T.A. 1191">16 B.T.A. 1191; J. T. Crane et al.,19 B.T.A. 881">19 B.T.A. 881; and Joseph A. Steinle, Administrator, et al.,19 B.T.A. 325">19 B.T.A. 325.

There remain for consideration the proceedings of Souers, Butler, Gunter and Freeman, Docket Nos. 31406, 31407, 31550, and 31408, respectively, each involving the year 1922, and the period January 1 to April 30, 1925, and the appeal of the Illinis Company, Docket No. 31409, involving only the last mentioned period. Although the pleadings raise no question of our jurisdiction, we believe that for reasons which we shall now set forth, we can not properly make a redetermination in respect to the company's appeal.

The deficiency letter was addressed to the "Coca-Cola Bottling Company, 456 East 31st Street, Chicago, Illinois, c/oLouisiana Coca-Cola Bottling Company, Canal and Robertson Streets, New Orleans, Louisiana." The addressee has been referred to herein as the Illinois Company.

The petitioner states:

That the Taxpayer is a corporation, duly organized, formerly existing, and voluntarily dissolved pursuant to the Laws of the State of Illinois, with its principal office, during the tenure of its business, at 456 East 31st Street, Chicago, Illinois, herein appearing through Alfred B. Freeman, President of the Coca-Cola Bottling Company of Chicago, Inc., a corporation organized and existing pursuant to the Laws of the State of Louisiana, with its principal office and place of business at 456 East 31st Street, in the City of Chicago, in the State of Illinois, and individually a member of a syndicate composed of said Alfred B. Freeman and Messrs. James P. Butler and Sidney W. Souers of the City of New Orleans and F. E. Gunter of the City of Saint Louis, in the State of Missouri, which syndicate constituted the principal stockholders of said Coca-Cola Bottling Company at the date of its liquidation and final and complete voluntary dissolution during the Calendar year 1925.

The verification was by affidavit as follows:

AFFIDAVIT

STATE OF LOUISIANA,

Parish of Orleans:

BEFORE ME, the undersigned Notary Public, personally came and appeared Alfred B. Freeman, who being by me first duly sworn, deposes and says that he is President of the Coca-Cola Bottling Company of Chicago, Inc., a Corporation organized and existing pursuant to the Laws of the State of Louisiana, which Corporation purchased the assets and assumed such liabilities of the Coca-Cola Bottling Company, Petitioner herein, as appeared on the books of the vendor, the said Coca-Cola Bottling Company, at the date of the purchase; that he was one of the principal stockholders of said Coca-Cola Bottling Company, being a Member of a Syndicate holding the majority of the stock thereof; that he has read the above and foregoing petition and that the allegations therein contained, except such as are made on information and belief, are true and correct and that he verily believes the latter to be true.

(Signed) ALFRED B. FREEMAN.

MAX M. SCHAUMBURGER

Attorney at Law and Notary Public

620-1 Whitney Central Building,

New Orleans, La.

Sworn to and Subscribed before me, this 17th day of September, 1927.

(Signed) MAX M. SCHAUMBURGER,

Notary Public.

[SEAL]

The answer admits, and testimony establishes, that the Illinois Company was dissolved and fully liquidated some time during 1925. In First Bond & Mortgage Co.,21 B.T.A. 1">21 B.T.A. 1, we said:

* * * It has frequently been held that when a corporation is dissolved, it is dead, and any prolongation of its existence, even for purposes of litigation, is entirely dependent upon statutory authority. Oklahoma Natural Gas Company v. Oklahoma,273 U.S. 257">273 U.S. 257. * * *

Section 14, chapter 32, of the General Laws of the State of Illinois (p. 1889, Callaghans Illinois Statutes Annotated), provides:

14. Continuance of Powers after expiration - Suing and defending § 14. All corporations organized under the laws of this state, whose powers may have expired by limitation or otherwise, shall continue their corporate capacity for two years for the purpose only of collecting debts due such corporation and selling and conveying property and the effects thereof. Such corporations shall use their respective names for such purposes and shall be capable of prosecuting and defending all suits at law or in equity.

See also § 79, chapter 32, of the same statutes.

The petition in the proceeding under discussion was filed with the Board on September 22, 1927. We do not know the exact date of dissolution of the Illinois Company, it only appearing that the event occurred during 1925. Granting, but not deciding, that the above quoted statute is in any way applicable to proceedings before the Board, it may be, nevertheless, that the two-year limited extension of corporate powers had expired before this proceeding was instituted and, therefore, that no legal entity existed to institute such a proceeding. Under such circumstances, the Board is without jurisdiction. S. Hirsch Distilling Co.,14 B.T.A. 1073">14 B.T.A. 1073.

It happens, however, that in at least one other particular the record definitely fails to demonstrate jurisdiction. In Consolidated Companies, Inc.,15 B.T.A. 645">15 B.T.A. 645, we said:

In an action brought in a court of limited jurisdiction, it is generally the rule that all facts necessary to show jurisdiction of the court must be pleaded and proved. 31 Cyc. 57-104. The jurisdiction of this Board is prescribed and limited by statute, and all essential jurisdictional facts must therefore affirmatively appear.

* * *

* * * The jurisdiction of the Board depends directly upon the filing of the petition for redetermination by the taxpayer against whom the Commissioner has determined the deficiency. Unless the petition is filed by such taxpayer, or by some person lawfully authorized to act in behalf of the taxpayer, the Board is without jurisdiction.

Among the essential facts to be pleaded and proven, is adequate authority by which the person, purporting to present an appeal on behalf of a corporation, acts. Louisiana Naval Stores, Inc.,18 B.T.A. 533">18 B.T.A. 533. The Board will raise this question of its own volition. Martha M. Hanify et al.,21 B.T.A. 379">21 B.T.A. 379.

This proceeding is captioned: "Coca-Cola Bottling Company, Petitioner, v. Commissioner of Internal Revenue, Respondent." It states that the said company is:

herein appearing through Alfred B. Freeman, * * * a member of a syndicate composed of said Alfred B. Freeman and Messrs. James P. Butler, * * * Sidney W. Souers * * * and F. E. Gunter, * * * which syndicate constituted the principal stockholders of said Coca-Cola Bottling Company at the date of its liquidation and final and complete voluntary dissolution during the calendar year 1925.

The petition is verified by Freeman, individually. There is nothing in the record to indicate that Freeman or any member of the syndicate ever bore any other relation to the Illinois Company than that of a stockholder.

Unless expressly or impliedly authorized, the stockholders or members of a corporation are not its agents in any sense merely because of their relations, and, acting as individuals, they have no power to bind it. Fletcher, Cyclopedia Of Corporations, page 2916; Humphreys v. McKissock,140 U.S. 304">140 U.S. 304; Sellers v. Greer,172 Ill. 540">172 Ill. 540; 50 N.E. 246">50 N.E. 246; Bouton v. Board of Supervisors McDonough Co.,84 Ill. 384">84 Ill. 384; Hopkins v. Roseclare Lead Co.,72 Ill. App. 372">72 Ill.App. 372. In Beardstown Pearl Button Co. v. Oswald,130 Ill. App. 290">130 Ill.App. 290, the Court said: "Under our statutes a corporation can act only through its board of directors and officers."

There is no pleading or evidence of express or implied authority for Freeman or his comembers of the syndicate to act for the Illinois company.

It follows that even if this proceeding was commenced within two years following dissolution of the corporation and that its commencement is within the extension of powers granted by section 14, supra, of the Illinois statutes, yet the proceedings not being authorized, no decision of ours would bind the Illinois Company. Our determination of a deficiency under such circumstances would be a nullity, and accordingly, we hold on our own motion, that we have no jurisdiction. S. Hirsch Distilling Co., supra.

The last group of proceedings to be discussed is composed of the four individual appeals of Souers, Butler, Gunter, and Freeman, relating to the year 1922, and the period January 1, to April 30, 1925.

With respect to each of the taxable periods mentioned, these petitioners attack the constitutionality of section 280 of the Revenue Act of 1926, under the provisions of which the liabilities have been proposed. With one exception, relating to the proposed penalty in the amount of $2,644.64 for the 1925 period, the same, or substantially the same, contentions were advanced in the appeals of Gunter and Freeman relating to the year 1921. Such contentions were there denied on authority of Cappellini, supra. In the instant proceedings, they are denied on the same authority.

The one unique attack upon the constitutionality of section 280 relates only to the 1925 period and is pleaded in each case as follows:

The determination of the tax contained in the said deficiency letter aforesaid is based upon the following errors, to wit:

* * *

(4) That, should this Honorable Board hold that the said section of the said Revenue Act is constitutional and that the said Commissioner did not err in relying upon said section, then petitioner alleges that, although said section 280 of the Revenue Act of 1926 may authorize the imposition and assessment of tax (due by a transferor) directly against the transferee of its assets, said section of the Act does not and can not authorize the imposition and assessment of a penalty for delinquency in filing a return; and that if said section did or does authorize the assessment of a penalty against a transferee, that then, and in that case, the said section of said act is unconstitutional, null and void.

Section 280(a)(1) of the Revenue Act of 1926 specifically authorizes the inclusion of "interest, additional amounts and additions to the tax" in the amount which may be assessed against and collected from a transferee. A penalty is an addition to the tax. Gutterman Strauss Co.,1 B.T.A. 243">1 B.T.A. 243. Section 3176, Revised Statutes as amended by section 1003, Revenue Act of 1924. A contention respecting the constitutionality of section 280 so far as it authorizes the assertion of a liability of a transferee for penalties imposed upon his transferor, might therefore, be disposed of upon authority of Cappellini, supra, since such a contention is an attack upon a substantive provision of the said section 280. But we may point out that petitioners' pleadings respecting the assertion of a liability against them for a penalty imposed upon their transferor, do not raise an issue of law in respect to the constitutionality of the statute involved. In order to raise a question of law with respect to the constitutionality of a particular section of a revenue act, it is not sufficient to allege in general terms that the section attacked is unconstitutional. The specific constitutional provision alleged to be violated must be pleaded. Frederick N. Dillon,20 B.T.A. 690">20 B.T.A. 690. In the absence of such pleadings, petitioners' contentions must fail.

The only remaining issue is the March 1, 1913, value of the Coca-Cola franchise of the Illinois Company. Petitioners contend that the value of that franchise on the date mentioned was $89,536.96, the amount at which it was then carried on the company's books. The respondent, in computing a profit upon sale of the company's assets in 1925, has determined the March 1, 1913, value of the franchise as $7,870, which amount is stipulated to be the original cost of the asset when it was acquired in 1906.

Petitioners rely on three principal points in support of the valuation which they claim for the franchise. The first of these points is that the franchise was carried on the books of the company prior to March 1, 1913, at the value which they now contend was its actual value on that date, i.e., $89,536.96. The second point is that "substantially contemporaneous stock sales" indicate a franchise value of the amount claimed on March 1, 1913. The third point is that compentent expert testimony supports the valuation claimed on the basic date. We shall consider these contentions in the order named.

It should be borne in mind that the mere fact that an increase in value of the franchise had been entered on the books prior to March 1, 1913, does not establish that the franchise had in fact the value at which it was carried on that date. Book entries are not conclusive. Doyle v. Mitchell Bros.,247 U.S. 179">247 U.S. 179. The question is not what was written up as the value of the franchise, but what was the fair market value of the franchise on March 1, 1913. York Hotel Corporation,1 B.T.A. 672">1 B.T.A. 672; Walcutt Brothers Co.,1 B.T.A. 910">1 B.T.A. 910. Such facts, however, may be considered in connection with other facts.

The third point relied upon by petitioners in support of the franchise value claimed, is that competent expert testimony supports such a valuation. Petitioners presented two witnesses who offered their opinions as to the March 1, 1913, value of the franchise involved. These witnesses were Alfred B. Freeman, one of the petitioners, and Charles V. Rainwater. We shall consider their testimony separately and in some detail.

Freeman testified that he has been engaged in the Coca-Cola business since November 20, 1906, when he acquired interests in the Louisiana Coca-Cola Bottling Company and the Coca-Cola Bottling Company of Baton Rouge, domiciled at New Orleans and Baton Rouge, respectively. He has since acquired interests in various other Coca-Cola companies and is at present connected with the following named concerns in the capacities indicated: Louisiana Coca-Cola Bottling Company, secretary, treasurer and manager; Coca-Cola Bottling Company of Chicago, president; Great Lakes Coca-Cola Bottling Company, president; Wisconsin Coca-Cola Bottling Company, president; Baton Rouge Coca-Cola Bottling Company, secretary-treasurer; Hammond Coca-Cola Bottling Company, president; Coca-Cola Bottling Company of Lake Charles, president; Morgan City Coca-Cola Bottling Company, president; Wesson Oil Company, director; Snowdrift Company, director. He is also an officer and director of a mortgage company and was for three years vice president of a bank.

His attention was first directed to the Illinois Company in 1924. With the view of investing in it he then made an investigation of the company, particularly in respect of its lease, the territory and population served, and the possibilities for increasing the business and earnings by additional capital and more efficient management. He formed an opinion that the business had not been managed to the best advantage for the preceding two or three years because the persons conducting it had had no Coca-Cola experience when they went into the business and, according to their statements, were operating on limited capital.

He found that the company's franchise was what is known as a "first-line" contract, i.e., an exclusive bottling franchise for a stated territory, under which certain so-called "sub-bottlers'" franchises might be granted, covering limited areas within such territory. A "first-line" franchise holder receives either a flat rental for the territory granted, or a royalty, usually 20 cents per gallon for syrup furnished "sub-bottlers."

Freeman also familiarized himself with the company's books with the view of ascertaining the possibilities of incurring an income tax liability in event he acquired control of the company and desired to dispose of its assets in any way. While the records for that date were not available, he was informed that the franchise involved had been set up on the company's books at a value of $89,536.96, sometime prior to March 1, 1913.

The franchise of the Illinois Company embraced territory described as the "City of Chicago and 50 miles therefrom in all directions in the State of Illinois." Included in that area are the towns of Aurora, Joliet, Waukegan, Elgin, and Chicago Heights and the Great Lakes Naval Training Station. Joliet is the site of the Illinois Steel Company's plant, the city having a population approximately equal in number and character to that of Birmingham, Ala., where as the witness knew, sale of Coca-Cola was profitable. Whether or not such conditions existed in 1913, does not definitely appear.

The territory embraced by the franchise had in 1913 a population of about 2,000,000. The witness estimated that "any reasonable development of the franchise in the Chicago territory would mean, on the 10 bottles per capita basis, 20,000,000 bottles of Coca-Cola, or 166,666 gallons per annum, and the experience of bottlers in plants that were the average plants, was that the profit per annum should approximate $1 per gallon."

Based upon the factors recited above, and his experience in the business, the witness stated that the franchise of the Illinois Company would, in his opinion, be "worth several hundred thousand dollars * * * certainly more than $89,000 or more than even $100,000" on March 1, 1913.

The second witness who offered his opinion as to the March 1, 1913, value of the franchise involved, was Charles V. Rainwater, secretary and treasurer of the Coca-Cola Bottling Company of Atlanta, herein referred to as the Whitehead Company.

Rainwater testified that he had been engaged in the Coca-Cola business since 1902, that he was at present interested in 10 or 12 Coca-Cola companies, and that he had no interest in the instant proceedings. When asked to express his opinion as to the value of the franchise involved, he stated:

Well, the method, I think, of arriving at a value on a proposition of that kind, could be fairly accurately stated. Of course, at that time, a territory like Chicago was more or less speculative in value; and we could only set up a valuation very probably in line with what other territory similarly situated, very probably had accomplished; and from my observation in the business, and particularly of the success of certain large communities, I should say that, taking into consideration the population of Chicago and the amount of territory covered by the particular contract in question, that the franchise should [have] easily been worth $150,000 or $200,000.

He further testified that he believed a willing buyer would have paid a willing seller such a price for the franchise on March 1, 1913.

This witness was not familiar with the management or books of the Illinois Company for the period 1906 to 1913, and did not profess to have any actual knowledge of its business.

The stock sales made prior to March 1, 1913, are entitled to but little weight. The volume of stock sold is not large enough to indicate, clearly, any market value. However, such sales should not be wholly ignored.

The most potent evidence of value presented by petitioners was the testimony of Freeman and Rainwater. Those witnesses thoroughly qualified as expert, experienced Coca-Cola dealers. While they possessed no knowledge in 1913 of the individual plant here involved, they did have knowledge at that date of the Coca-Cola trade as it existed in the country in general. They knew the factors necessarily involved which would determine the value of a franchise to operate in a given area. At the date of the hearing they knew, at least historically, the condition of the area controlled by the franchise here involved, with reference to those necessary factors. Their appraisement of the March 1, 1913, value was not less than $100,000, and probably much greater. The company had set up on its books, prior to March 1, 1913, a value of $89,536.96.

It must be conceded that the expert testimony here submitted is vulnerable in several particulars, especially in view of the fact that neither of the witnesses was acquainted with the plant in question in 1913, or for several years thereafter, and, further, because of the fact that their estimate of value was not based on what had been accomplished in prior years, but rather on what could be accomplished under efficient management.

However, a franchise such as the one here involved, unlike many franchises, grants to its holder a monopoly of the business authorized thereby, and the problem of determining the value of the franchise is to know and consider the several pertinent and controlling factors that determine the probable volume of business that may reasonably be expected, and then by using a known percentage of profit on such volume, compute the annual profit and use such profit as a basis for determining the value of the franchise. The foregoing seems to have been the method used by the two witnesses hereinbefore named. Under the circumstances of this case, it seems that no other method was available. All the factors necessary in such a method were known to the witnesses. We believe that their testimony is worthy of substantial weight and should be strongly persuasive in effect. As we said in H. H. Blumenthal,21 B.T.A. 901">21 B.T.A. 901: "* * * We must give due and careful consideration to the opinions of those whose demonstrated qualifications give their opinions weight or authority." The opinion testimony herein is to the effect that the March 1, 1913, value of the franchise in question was not less than $100,000, and probably more. The books of the company show a valuation set up just prior to 1913, of $89,536.96, and petitioners are claiming the last named amount. We, therefore, find and hold the March 1, 1913, value of the franchise to be $89,536.96.

The individual petitioners, as transferees in liquidation of assets of the Illinois Company, each in an amount in excess of the deficiencies herein involved, and being liable as such transferees for the unpaid income and profits tax of that company for the year 1921, the unpaid income tax for the year 1922, and the unpaid income tax and penalty for the period January 1 to April 30, 1925, will have judgments issued against each of them in the full amount of such income taxes and penalty, as determined upon recomputation in accordance herewith, plus interest thereon from February 26, 1926. Grand Rapids National Bank,15 B.T.A. 1166">15 B.T.A. 1166; Annie G. Phillips et al.,15 B.T.A. 1218">15 B.T.A. 1218; and Henry Cappellini et al.,16 B.T.A. 802">16 B.T.A. 802.

Reviewed by the Board.

The proceeding of the Coca-Cola Bottling Company, Docket No. 31409, will be dismissed for lack of jurisdiction. Judgment will be entered under Rule 50 in the proceedings, Docket Nos. 27180, 27181, 27264, 27307, 31406, 31407, 31408, and 31550.

SMITH, STERNHAGEN, and MURDOCK concur in the result only.

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Footnotes

• 1. Apparently should be 1909. ↩

• 1. Upon the figures given this should be $102,802.89. ↩