Briggs-Killian Co. v. Commissioner ( 1939 )

BRIGGS-KILLIAN COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Briggs-Killian Co. v. Commissioner

Docket No. 92562.

United States Board of Tax Appeals

40 B.T.A. 895; 1939 BTA LEXIS 783;

November 14, 1939, Promulgated

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Petitioner's stock was owned by M. B. Killian and R. W. Briggs in the proportion of 45 and 55 percent, respectively. In 1936 Killian, individually, contracted with Heldenfels Brothers to supervise, manage, and finance a paving contract the latter had obtained from state authorities. Killian rented machinery and equipment from petitioner, R. W. Briggs financed the undertaking, and they divided the profits upon the same basis as their stock ownership in petitioner. Respondent taxed the profits to petitioner under section 45 of the Revenue Act of 1936. Held, that the agreement between Killian and Heldenfels Brothers was an individual undertaking in which petitioner had no interest and the profits therefrom are not taxable under section 45 as income of this petitioner.

Robert L. Sonfield, Esq., and Ira S. Taylor, Esq., for the petitioner.

I. M. Tullar, Esq., for the respondent.

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ARNOLD

This proceeding involves a deficiency in income tax for 1936 in the amount of $2,264.42. The issue presented is whether the profit derived from a certain paving contract should be regarded as taxable income of this petitioner under section 45 of the Revenue Act of 1936. If section 45 is held applicable, petitioner challenges the validity of the section under the Fifth Amendment to the Constitution. The parties have stipulated an issue involving the amount of depreciation to which petitioner is entitled and effect will be given to their stipulation under Rule 50.

FINDINGS OF FACT.

Petitioner, a Texas corporation, was organized in 1932 by R. W. Briggs & Co. to engage in the contracting business. It was equipped to handle and most of its contracts were for road construction work. It was one of four companies organized at or about the same time by R. W. Briggs & Co. to engage in the contracting business, in each of which a former superintendent became the owner of a 45 percent stock interest. During the taxable year M. B. Killian owned 45 percent of petitioner's stock, R. W. Briggs owned slightly less than 55 percent thereof, and R. H. Klossner owned the remainder, two-tenths of 1 percent.

Prior to the incorporation of the petitioner, M. B. Killian had been employed by R. W. Briggs & Co. as a superintendent of road construction work. After petitioner was incorporated, Killian was made vice president and placed in charge of its construction work by R. W. Briggs, who was president of the petitioner. All of Killian's transactions during the taxable year were in his capacity as an official of the petitioner, except the transaction hereinafter related.

Prior to May 9, 1936, Heldenfels Brothers acquired a contract for a paving project in Neuces County, Texas. Having no equipment to do that kind of work, and after negotiating with various contractors, F. W. Heldenfels, the owner of Heldenfels Brothers, approached Killian in May 1936, proposing that some kind of an agreement be worked out whereby Killian could do the work for Heldenfels Brothers and supervise it. After securing the approval of R. W. Briggs, Killian agreed to superintend and manage the job to final completion of the contract. The proposition submitted by Heldenfels Brothers and accepted by Killian is contained in a letter to the latter dated May 9, 1936. This letter reads as follows:

DEAR MR. KILLIAN: This confirms our verbal agreement and constitutes a contract between us as to the method of handling our highway job in Nueces Conuty known as F.A.P. 657-I.

For one dollar and other valuable considerations we hereby employ you to superintend and manage the construction of our highway job in Nueces County known as F.A.P. 657-I from date to final completion and acceptance thereof. You are to have exclusive management and control of the aforesaid job until final completion thereof.

We are to receive out of each current estimate five cents ($0.05) per square yard of concrete pavement as allowed thereon, and further out of the final estimate we are to receive one-half (1/2) of one cent ($0.01) per square yard of concrete pavement laid on the entire project. In addition thereto we have already done with our own forces a certain amount of roadway excavation and structure work, and it is understood that we are to receive full payment, including retainage for such work as has been done by us to date. It is agreed that no charges, other than the above payments, will be made by us against this job.

After payment to us of the aforementioned 5 1/2 cents per square yard of concrete pavement you are to receive all profits of whatever nature accruing from the job and are to stand all losses.

Yours truly,

HELDENFELS BROTHERS,

By

[Signed] F. W. HELDENFELS, Owner.

Accepted this 9th day of May, 1936.

[Signed] M. B. KILLIAN

M. B. KILLIAN

By a second letter bearing a like date provision was made for handling estimates and payments in connection with this contract. It was agreed that three accounts would be opened in the Corpus Christi National Bank, to be known as Heldenfels Brothers, Nueces County, F.A.P. 657-I, estimate account, operating account, and pay roll account. All withdrawals from these accounts had to be approved by Killian or were subject to his signature exclusively, and proper authorizations to this effect were to be given the bank by Heldenfels Brothers. All estimate checks received by Heldenfels Brothers were to be promptly endorsed and deposited in the estimate account.

The paving contract was approximately a $285,000 project. Killian had no machinery, equipment, or capital sufficient to handle this contract and relied upon R. W. Briggs for financial backing. The arrangement was made in May, actual construction was started in June, and work was completed in November 1936. Machinery and equipment belonging to the Briggs-Killian Co. were used on this job, and a Briggs-Killian Co. mechanic kept it in repair. The Briggs-Killian Co. was paid $5,171.14 as rental for the use of its machinery and equipment. Materials, supplies, and credit to the extent necessary to complete the contract were furnished by or through R. W. Briggs. Compensation insurance on the job was provided by Heldenfels Brothers.

A profit of approximately $20,000 resulted from the Nueces County paving contract. M. B. Killian retained 45 percent, or $9,000, of the profits and paid over 55 percent, or $11,000, to R. W. Briggs. No part of the profit was paid to the petitioner. The division of profits was made without benefit of any written agreement.

A separate and complete set of books was kept on the Nueces County paving project under the control and supervision of R. H. Klossner, who also kept the books and records of the Briggs-Killian Co., R. W. Briggs & Co., Briggs-Darby Construction Co., Briggs Spence Co., and the other Briggs companies.

All other contracts for road building during the taxable year were negotiated by Killian in the corporate name of Briggs-Killian Co.

The agreement between M. B. Killian and Heldenfels Brothers on May 9, 1936, was an individual undertaking in which petitioner had no interest.

OPINION.

ARNOLD: Section 45 of the Revenue Act of 1936, ^{if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect income. Invoking the authority conferred by this section, the respondent has determined that it is necessary to allocate the profits resulting from completion of the Nueces County paving project to this petitioner. The applicability of the section is not only challenged by petitioner but also its constitutionality if applied to the instant facts.}

The legislative purpose of section 45 was to prevent the avoidance of taxes or the distortion of income by the shifting of profits from one business to another. Asiatic Petroleum Co. v. Commissioner, 79 Fed.(2d) 234, 237, affirming 31 B.T.A. 1152">31 B.T.A. 1152; certiorari denied, 296 U.S. 645">296 U.S. 645. To accomplish this purpose the Congress vested broad discretionary powers in the respondent. Where, as here, the respondent has exercised his discretion, the burden is placed upon the petitioner of showing that respondent's determination is arbitrary and that he has abused the authority vested in him. Welworth Realty Co.,40 B.T.A. 97">40 B.T.A. 97, 100; Connery Coal & Investment Co. v. Commissioner, 84 Fed.(2d) 485. Nowland Realty Co. v. Commissioner, 47 Fed.(2d) 1018.

The petitioner has attempted to meet its burden by showing that section 45 has no application to the present circumstances. The contract between M. B. Killian and Heldenfels Brothers was produced for the purpose of showing that it was a private agreement between the contracting parties. No portion of this agreement indicates that Killian was acting for any one other than himself. Heldenfels Brothers was a separate organization connected in no manner with petitioner or any other Briggs company affiliate. Killian and R. W. Briggs testified unequivocably that it was an individual undertaking, and no facts or circumstances were developed on cross-examination, or otherwise, which refuted or weakened their statements.

The respondent relies upon Asiatic Petroleum Co., supra, and upon the fact that profits were divided by Killian and Briggs upon the same basis as their stock ownership in petitioner; that the books and records of the paving job were kept by the same party that kept the books and records of other Briggs companies; that petitioners' machinery and equipment and its mechanic were used in completing the contract, and that Killian, individually, was financially unable to perform this contract. These factors are all evidentiary and must be weighed in determining the issue, but they are insufficient, when considered with the other facts of record, to justify a conclusion that profits individually earned should be allocated to and taxed as the income of a corporation not a party to the undertaking. To so hold would, in our opinion, be an unwarranted extension of section 45 which would distort rather than clearly reflect income. The cited case is not controlling because it involved an entirely different factual situation.

According to respondent the fact that R. W. Briggs, individually, owns a majority of the stock in a number of companies creates a situation where two or more organizations, trades, or businesses are owned or controlled directly or indirectly by the same interest. If, says respondent, section 45 permits a "distribution, apportionment, or allocation" of income within, a group of related or controlled corporations, in order to arrive at the true tax liability of a corporation, wherein does the statute prevent him from making a distribution, apportionment, or allocation of income to a corporation within that same group when that corporation attempts to shift the profit outside a group in order to avoid its true tax liability?

The answer to this question is that there is no business relationship between the single individual contract performed here and the continuing business enterprise of this petitioner. If the individual were continually engaged in the same line of endeavor as petitioner, used the latters' assets, its employees, its office force, etc., it might be necessary, that, in order to clearly reflect income, the accounts of the two businesses, individual and corporate, should be consolidated. But there was no confusion of accounts here which required a distribution, apportionment, or allocation in order to clearly reflect income. Respondent makes no effort to justify his determination upon the ground of confusion in the accounts or inability to determine income. In fact, the opposite is true; the amount of profit was determined without apparent difficulty from the books and records. Petitioner received none of the profits and we seriously doubt that if losses had resulted respondent would have made any allocation of such losses so as to permit a deduction thereof by petitioner. Ellison v. Commissioner, 76 Fed.(2d) 509; Remco S.S. Co v. Commissioner, 82 Fed.(2d) 988.

We are satisfied that respondent's determination, if sustained, would project section 45 into a tax field that was not contemplated by Congress when that section was enacted. The purpose of the section was to permit respondent to act where the necessity existed, and where, without some affirmative action on his part, taxes might be evaded, or income would not be clearly reflected. Here, there was no attempt to evade taxes, and, since petitioner's books and accounts clearly reflect its income, there was no necessity for respondent to invoke section 45. His action in that regard is, therefore, disapproved.

Decision will be entered under Rule 50.

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Footnotes

• 1. SEC. 45. ALLOCATION OF INCOME AND DEDUCTIONS.

  In any case of two or more organizations, trades or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. ↩