Grey Bull Corp. v. Commissioner ( 1933 )

GREY BULL CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Grey Bull Corp. v. Commissioner

Docket No. 47376.

United States Board of Tax Appeals

27 B.T.A. 853; 1933 BTA LEXIS 1285;

March 7, 1933, Promulgated

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A corporation, operating under a separate contract with each of its shareholders, to graze and market the shareholders' livestock without taking title and divide among them the net proceeds in proportion to the number of livestock contributed by each, which makes such distribution pursuant to such contracts, held to have no net taxable income from such operations.

John W. Drye, Jr., Esq., for the petitioner.

L. W. Creason, Esq., for the respondent.

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STERNHAGEN

Respondent determined deficiencies in petitioner's income taxes for the fiscal years ended October 31, as follows: 1924, $2,191.69; 1925, $1,396.24; 1926, $9,502.02; 1927, $15,950.41.

Petitioner contends that it is tax-exempt as a cooperative corporation under section 231(11), Act of 1924, and section 231(12), Act of 1926, and, failing that, that it had no income, acting merely as agent for its shareholders. A third error, assigned in the alternative, relates to the computation of income from its operations.

FINDINGS OF FACT.

The petitioner is a corporation of the State of Wyoming, with its office and place of business at Cody. It was organized in April, 1920, by W. R. Coe, L. G. Phelps, and E. V. Robertson, for a term of fifty years, with an authorized capital stock of $250,000, consisting of 2,500 shares of common stock of the par value of $100 per share. The objects and purposes of the corporation, as set forth in its articles of incorporation, are as follows:

* * * to engage in a general live-stock, farming and ranching business, both on its own account and as agent; to agist, feed, range, graze, manage, herd, control, brand, care for, purchase, market and sell live-stock of every kind, both on its own account and as agent for other persons or corporations; to buy, lease, cultivate, manage, operate and sell farm and ranch properties and products therefrom both on its own account and as agent for other persons or corporations; and in the carrying on of its general line of business it shall have power to acquire, by purchase, lease and contract, or otherwise, and to dispose of lands, live-stock, water rights, ditches and farm and ranch property of all kinds, both on its own account and for its own benefit and as agent for other persons and corporations; to borrow money and to issue bonds, notes or other evidences of indebtedness in such form and at such times and in such installments as shall be determined by the corporation and for the purpose of securing the payment of such indebtedness to mortgage, pledge or hypothecate all or any part of the property of the corporation, and generally to do all things necessary or incident to carrying on any of the business and purposes of the corporation as herein set forth.

Shortly after its organization the petitioner entered into written contracts with W. R. Coe, L. G. Phelps, and A. A. Anderson, who were engaged in the livestock business and owned adjoining tracts of grazing land, for the operation and maintenance of their livestock interests. The contracts in which Coe, Phelps and Anderson were designated as "owner" and the petitioner as "agent" were to be in effect for fifty years, subject to termination by the owner upon six months' notice. By the terms of these contracts the owners leased to the agent for a stated annual rental certain lands for the purpose of running and grazing livestock thereon; agreed to raise hay and grain on part of the leased land at their own expense and sell it to the agent at stated prices; and agreed to deliver to the agent a certain number of livestock, together with equipment and other property, the aggregate value of which was fixed in the contract. The agent might, with the approval of the owners, purchase additional livestock, to be allotted pro rata as per their contributions. The title to all property delivered by the owners to the agent should remain in the owner, and the increase of all livestock, so delivered, and livestock purchased for the account of the owners specifically and the increase thereof, should be branded with the brand of the owner. The possession and management of all property should be entrusted to and be vested in the agent in its capacity as agent, and the agent should graze, feed, run, brand and properly care for and market and sell livestock from time to time, with the care and powers of an owner. The owners should pay to the agent as full compensation for such services $17.50 per annum for each head of cattle, and $3.50 per annum for each head of sheep. Each owner agreed to subscribe for a certain number of shares of the agent corporation and pay therefor as called upon by resolution of the directors, and agreed not to sell or transfer his shares while the contract was in force. In the contract with Coe there was a provision permitting a transfer of shares to E. V. Robertson; and in the contract with Anderson a provision permitting a transfer of shares to the corporation for cancellation for cash at par value. Each contract recited the understanding that simultaneously with its execution the agent was entering into similar contracts with others engaged in the livestock business, and that their names and the cash value of the assets contributed at execution of the contract should be as fixed in a schedule attached to each contract, and that such schedule should be revised as additional owners entered into similar contracts with the agent, and that all divisions of net proceeds or net profits between the parties named in the schedule, or any revisions thereof, should be in proportion to the cash value of their interests as set forth therein. It was further provided that after deducting all expenses of management and any other expense incurred in connection with its business as agent and reserving funds necessary for the operations of the agent as such, any surplus remaining in the agent's hands should be distributed to the owners at least once a year, the pro rata share of such surplus due to each owner to be based on his interest as evidenced by the schedule attached to each contract or any revision thereof. The agent further agreed to keep and maintain for each owner the same kinds and classes of livestock as were delivered to it by the owner at the execution of the contract, and also, as near as might be, to keep and maintain the relative number of the various kinds of livestock the same as originally delivered. In the event of withdrawal of any owner and termination of the contract, the agent should deliver to such owner, on the day of withdrawal, all livestock in such owner's brand and other property delivered to the agent by the owner up to the value fixed for the property delivered to the agent at the time of execution of the contract, subject to increase or decrease by his proportionate share of the amount by which the total assets in the hands of the agent at the time of withdrawal, based on the values in the schedule, should be greater or less than the aggregate assets in the original schedule.

In 1920, when the contracts were executed, the owners delivered livestock to the petitioner and the petitioner issued shares of its capital stock to them. Since that time, and throughout the fiscal years ended October 31, 1924, 1925, 1926, and 1927, the petitioner has operated exclusively under contracts with owners, and has not conducted any business on its own account. However, the petitioner operated under the Phelps contract only until May, 1923. Phelps died in 1922 and in May, 1923, his estate terminated the contract and the parties effected a settlement as provided therein. The contracts with Coe and Anderson have been in effect from their execution until the close of the fiscal year ended October 31, 1927.

The total amount of capital stock authorized by the petitioner's charter or subscribed for in the contracts was not issued. Prior to the withdrawal of the Phelps estate there were issued and outstanding 67 shares, of the par value of $100 per share, of which 41 were held by Phelps and members of his family. These 41 shares were surrendered to the petitioner and canceled at the time of withdrawal, and the petitioner paid $100 per share to the estate.

When Phelps' estate withdrew in 1923, there was an increase in the herd, and livestock in their brand equivalent in number of Phelps' original contribution was returned to the estate, and the surplus bearing the Phelps brand was sold by the petitioner and the proceeds were distributed among all the owners pro rata according to the original contribution of livestock by each. The estate also received one or two trucks. The remaining 26 shares were held by the following, both before and after the withdrawal of the Phelps estate, and were the only shares outstanding during the fiscal years ended October 31, 1924, 1925, 1926, and 1927: W. R. Coe, 20 shares; A. A. Anderson, 5 shares; E. V. Robertson, 1 share.

The foregoing shares were paid for in cash at par. Robertson had no separate contract with the petitioner and made no original contribution of livestock or other assets to the petitioner. He acquired one share by transfer from Coe, as permitted by the terms of Coe's contract, for which he paid $100. At the same time he acquired, by waiver from Coe, an interest of 1/26 of whatever distributions were made to the owners after the withdrawal of Phelps.

When livestock and other assets were delivered to the petitioner, no assignment or other instrument transferring title thereto was made. The petitioner carried on the operation of feeding, ranging, grazing, branding, purchasing and marketing cattle and sheep. It conducted business generally in its own name, and it maintained bank accounts and purchased and sold livestock in its own name. It also purchased and paid for hay and grain for use in feeding the livestock. The livestock originally delivered was marked with the brand of the respective owners and as increases in the herd occurred each calf or lamb was marked with the same brand as that borne by its mother. The owners paid local taxes on the herds and grazing permits were issued to and paid for by the respective owners. The provision of the contracts for the payment by the owners to the agent of annual fees of $17.50 for cattle and $3.50 for sheep for its services was intended to provide operating expenses for the agent. However, this provision was waived by mutual consent of the owners and the fees were not paid. The operating expenses were provided through loans made to the agent either by the owners or by banks on notes of the agent endorsed in every instance by one or more of the owners. The land leased by the several owners consisted of adjoining tracts which were utilized as a common grazing ground so as to produce advantages and economies in management, and the provision in the contracts for payment of rentals to the owners was designed to equalize the differences in the acreage of each owner. The rentals were fixed in the contracts and the full amount was as a rule paid by petitioner to each owner, unless the operating expenses exceeded the income.

The petitioner carried on its books an account designated as "Owners' Trust Fund." There was no account allocating to petitioner any of the results of its operations. The petitioner's bank accounts were set up on its books and it maintained accounts for notes payable and accounts receivable.

The proceeds of all livestock sold and disbursements made in running the herd were entered in the Owners' Trust Fund Account. Payments on account of loans made by the petitioner, hay, grain, and other property purchased, including a small number of livestock, were made out of the proceeds of sales of livestock and charged through that account. The petitioner used sheep wagons, branding irons and auto trucks, and, whenever it was necessary to replace any of these assets, they were purchased by the petitioner out of proceeds of sales and charged to the Owners' Trust Fund account.

Throughout the taxable years the owners held interests in the assets in the Owners' Trust Fund, based on the amount of their original contributions of livestock and other property as follows: Coe, 20/26; Anderson, 5/26; and Robertson, 1/26; and distributions in those proportions were made during the fiscal years 1926 and 1927. None was made during the fiscal years 1924 and 1925.

The petitioner's books disclose income and disbursements for the fiscal years ended October 31, 1924, 1925, 1926 and 1927, as follows:

Year	Income	Disbursements	Profit or loss
1924	$267,528.97	$268,327.41	-$798.44
1925	273,296.57	279,046.94	-5,750.37
1926	294,465.91	275,812.38	+18,653.53
1927	376,697.15	269,931.26	+106,765.89

At the end of these fiscal years the credit balances in the Owners' Trust Fund account were as follows: 1924, $19,533.50; 1925, $8,933.14; 1926, $79,755.67; 1927, $124,022.23. The balance of $19,533.50 for 1924 was charged to undivided profits, but was credited back to the Owners' Trust Fund account at the close of the fiscal year 1926. These credit balances were carried forward from year to year and represented an accumulation of undistributed earnings. The books also contained asset accounts showing debit balances during the fiscal years ended October 31, 1924, 1925, 1926 and 1927, as follows:

Account	1924	1925	1926	1927
Machinery and equipment	$5,610.03	$5,134.86	$4,301.98	$6,339.13
Bucks	17,453.50	27,433.50	[?]	30,613.50
Horses	520.00	968.00	1,323.00	1,578.00
Bulls	None.	455.00	2,455.00	2,455.00

There was no depreciation account on the ledger and depreciation was credited to the asset account and charged into the Owners' Trust Fund account. Depreciation was credited to the machinery and equipment account in the amount of $1,711.62 for the fiscal year 1925, $1,447.43 for 1926, and $1,118.65 for 1927.

The petitioner's books show cash distributions to the owners as follows, which were charged to the Owners' Trust Fund account:

	Coe	Anderson	Robertson
December 29, 1925	$9,540.00	$2,385.00	$487.00
December 31, 1925	8,460.00	2,115.00	423.00
March 17, 1927	35,648.75	8,912.15	1,782.42

They also show distributions to Coe, Anderson and Robertson of $21,185.50, $5,296.40 and $1,059.30 on October 31, 1927, by way of credits to their personal accounts on the petitioner's books. These distributions were in the proportion of 20/26 to Coe, 5/26 to Anderson, and 1/26 to Robertson, and do not appear in any dividend account. No cash was ever distributed as a dividend by the petitioner, and all distributions were made under the contracts.

The respondent determined that the petitioner was not exempt from taxation and determined the deficiencies on the basis of net income as disclosed by its books for the fiscal years ended October 31, 1924, 1925, 1926, and 1927, of $18,533.51, $12,809.63, $70,822.53, and $118,151.20, respectively.

OPINION.

STERNHAGEN: The respondent treats the petitioner as the owner in the first instance of the proceeds from the sale of the livestock in its charge, and the distributions as dividends to shareholders. We are of opinion, however, that the evidence proves that the situation was otherwise. The petitioner, while it had broad powers under its charter, did only what was provided in its contracts with the individuals. The individuals were both shareholders in the petitioner as a corporation and contractors with it as an agent, bailee, or agister. Before the corporation could find income to itself and thus indirectly for its shareholders, it was obligated to fulfill its contractual duties, ; . These two aspects of its duties should not be confused as long as its conduct is bona fide and free from fraud or other compelling inequity. There is no suggestion here of either.

The corporation did not take title to the livestock. Whether in respect of it, the relation was that of general agency, bailment, or agistment, does not require decision here. Enough that it was not that of owner and that it involved only service for the owners. This service was apparently performed without compensation; but it was thus performed with the acquiescence of the corporate shareholders and there is no right in anyone else to complain. The contract which gave the control of the livestock also withheld the right to the proceeds and required distribution in accordance with the livestock contributed, irrespective of the corporate shares. The distribution was made on the books at once, not as a dividend, but through the Owners' Trust Fund account, and actually paid out from time to time. It may be assumed that the owners took proper account of the distributions in their individual tax returns.

We think that the evidence proves that the corporation during the years in question had no income, and that for this reason there is no deficiency. This makes it unnecessary to commit ourselves to a decision whether the corporation was such a cooperative organization as to be exempt by virtue of section 231(11) of the Revenue Act of 1924 or section 231(12) of the Revenue Act of 1926, as to which there is considerable doubt.

Judgment will be entered for the petitioner.