DocketNumber： Docket No. 29289.
Judges： Arundell
Filed Date： 4/30/1932
Status： Precedential
Modified Date： 11/2/2024
*1387 1. DEDUCTION - INVOLUNTARY CONVERSION. In 1918 the Alien Property Custodian seized and sold petitioner's stock in a domestic corporation engaged in the manufacture of textiles. The stock was sold for a sum in excess of cost to petitioner or its March 1, 1913, value and the proceeds were turned over to petitioner in October, 1921. In November, 1921, petitioner organized a corporation to engage in making sizing materials for sale to textile mills, and from time to time over a period of years made advances to the new corporation out of the funds turned over to him by the Custodian. Stock of the new corporation was issued to him at various times in satisfaction of his advances. The new corporation's plant was completed in 1922 and it began operations on November 1 of that year.
2. STATUTE OF LIMITATIONS. *1388 Petitioner's return for 1918 was filed May 4, 1922, and the deficiency notice was mailed April 28, 1927.
3. EVIDENCE - MARCH 1, 1913. VALUE. In the absence of any evidence to the contrary, the March 1, 1913, value of the textile mill stock as found by the respondent is accepted as correct.
*1371 In a previous report in this proceeding we disposed of two of the issues, holding that the seizure of petitioner's stock in 1918 by the Alien Property Custodian did not result in a deductible loss and that the profit on the sale of the stock by the Custodian in the same year represented income to petitioner. (
The remaining issues, to be decided at this time, are: (1) The March 1, 1913, value of the stock seized and sold by the Alien Property Custodian; (2) whether the statute of limitations bars assessment and collection; (3) whether the petitioner is entitled to the benefits of the "involuntary conversion" provisions of the revenue acts*1389 and the Settlement of War Claims Act; and (4) if these issues are decided against petitioner, whether he is entitled to have the gain taxed at 30 per cent under the Settlement of War Claims Act.
Our findings of fact in the previous report are incorporated herein by reference and only such parts thereof will be repeated here as are necessary to complete a chronological narrative of the facts.
FINDINGS OF FACT.
In 1902 petitioner, then a German citizen residing in the United States, organized and caused to be incorporated under the laws of New Jersey, the Garfield Worsted Mills. Thereafter and until 1917 petitioner was president of the corporation. Petitioner bought the original machinery of the corporation in Europe; he bought the real *1372 estate for it and had its building erected and machinery installed, formed its selling channels, and directed what products it should make.
The objects for which the Garfield Worsted Mills was incorporated, as stated in the certificate of incorporation in part, were:
* * * to own and operate mills for the spinning and manufacture of cotton, silk, wool and other similar materials; to carry on the business of manufacturing, *1390 refining, adapting, preparing and dyeing cotton, silk, wool, and similar materials and any of the products thereof; to buy, sell and deal in any such materials and the products thereof at any stage of manufacture; and to carry on any similar business.
To acquire the whole or any part of the business, good will and assets of any person, firm or corporation carrying on or proposing to carry on any class of the business which the corporation is authorized to engage in, and to hold any part of the capital stock of any such corporation.
In its early years the Garfield Worsted Mills manufactured cotton and silk goods, but for a number of years prior to 1918 its principal product was high grade worsted dress goods. In the process of manufacturing its goods the Garfield Worsted Mills used "sizing" which was a liquid or paste made by boiling in water a mixture of potato starch, glycerine and certain chemicals. The sizing was applied to the warp before being woven. The use of sizing strengthens the warp and protects it against chafing and breaking in the weaving. It is a necessary process in the manufacture of fine worsted goods. Garfield Worsted Mills made its own sizing, employing*1391 about fifteen men for that purpose, and normally it used about 50,000 pounds a year. None of the sizing was sold but was made only for the company's own use.
In August, 1914, petitioner left the United States for Europe for the purpose of obtaining dye materials for the Garfield Worsted Mills. His ship was stopped by a French cruiser before reaching port and he, with others, was taken from the ship and interned in France as an enemy until in 1917 when he was permitted to go to Switzerland. In June, 1918, through an exchange of prisoners, petitioner went to Saxony, in Germany. He took no active part in the war, being under pledge to the Swiss Government not to do so.
In 1918 petitioner owned 2,163 shares of common stock of the Garfield Worsted Mills and 1,730.4 shares of second perferred stock which had been issued as a stock dividend on the common in 1917 and 1918. All of these shares were seized by the Alien Property Custodian in 1918 and sold by him on December 9 of the same year at the following prices:
| 2,163 shares of common at $200 | $432,600 |
| 1,730.4 shares of second preferred at $80 | 138,432 |
| Total sale price | 571,032 |
*1373 Upon the seizure*1392 in 1918 the stock was placed by the custodian in a so-called trust to which dividends and interest received prior to sale were credited in the respective amounts of $27,676.40 and $26.48. Charges were made to the trust in 1918 in the amounts of $203.75 for commission and $5,750.39 as expense in connection with the sale of stock.
The fair market value of Garfield Woolen Mills common stock at March 1, 1913, was $130 per share. The second preferred stock owned by petitioner in 1918 had no cost in his hands.
During the period petitioner was in Germany he hoped to be able to return to the United States and regain control of the Garfield Worsted Mills. He kept up correspondence with his attorney in this country, urging the attorney to secure permission for him to reenter the United States. While in Germany petitioner learned of a new kind of sizing starch that was being manufactured in that country and after investigating the matter he negotiated with the inventors for the right to manufacture and sell the product in this country. On September 27, 1920, he wrote to his attorney, in part, as follows:
As I expect to be, sooner or later, in the possession of the funds, now held*1393 for me by the Custodian, I am looking for their reinvestment. With this view in mind I have made a contract, subject to the recovery of said funds, with the inventors of a patented process for the manufacture of certain starch products which in their new form are in large demand by the leading industries of the world. The inventors control the only factories making such products in Germany resp. Europe. It is my intention to start a factory in the U.S. to make it independent from imports of said chemicals from Europe.
I should imagine that such an addition to the chemical industry of the U.S. would be in the interests of the American people.
It will be important for the success of the undertaking if the preliminary work could be taken up very soon, and also if some of my funds could be released for this purpose.
On November 29, 1920, petitioner entered into a contract with the German holders of the patents covering the new starch which gave him exclusive rights to use the patents in this country.
Petitioner was readmitted to the United States in July of 1921, and in the same month he filed his first papers applying for United States citizenship. He was admitted to citizenship*1394 in 1928 or 1929.
Upon his return in 1921 petitioner filed claim for the proceeds of the property seized and sold by the Alien Property Custodian, and on October 26, 1921, such proceeds were paid over to him by United States Treasury check in the amount of $595,443.63. At that time he had no other money except some German marks, which were worth not more than $1,000 in United States money.
The total amount received from the United States was deposited by petitioner on the same day, October 26, 1921, in the New York *1374 Life Insurance and Trust Company. On the same day petitioner paid out to various firms and individuals sums totaling $120,000 as fees or commissions in connection with his claim against the Alien Property Custodian. On the same day petitioner transferred the sum of $50,000 to an account in the National Park Bank, which he called his personal account.
On various dates between October 26, 1921, and January 25, 1922, petitioner purchased Federal, municipal, and commercial securities in the aggregate amount of $454,175.91. These were purchased through the New York Life Insurance and Trust Company and were held by it until petitioner directed their sale*1395 from time to time when he needed funds. Petitioner's purpose in purchasing the securities was to have the money safely invested until such time as he should need it in the business in which he proposed to engage.
On November 2, 1921, petitioner caused the Haberland Manufacturing Company to be incorporated under the laws of New Jersey, with an authorized capital stock of 6,000 shares of common stock and an equal number of shares of preferred, both kinds having a par value of $100 per share. The powers of this company, as set out in its charter, were in part:
To undertake and carry on the business of manufacturing, refining, adapting and preparing chemicals, dyes, glues, starches, cotton and wool fabrics, and any and every product thereof; to buy, sell and deal in any such materials and the products thereof at any stage of manufacture, and to carry on any similar business; to purchase, build, lease and otherwise acquire and to own and operate factories for the manufacture of such or any similar materials and products.
To acquire the whole or any part of the business, good will and assets of any person, firm or corporation carrying on or proposing to carry on any class of the*1396 business which the corporation is authorized to engage in, and to hold any part of the capital stock of any such corporation.
Beginning with December 10, 1921, and continuing thereafter until 1930, petitioner from time to time made disbursements for salaries, supplies, operating expenses, and other purposes on behalf of the Haberland Manufacturing Company and also made direct advances to the company. The advances thus made directly and indirectly, plus interest, were credited to petitioner's account on the books of the Haberland Company. Capital stock of the company was issued to petitioner in satisfaction of his advances as follows:
| COMMON STOCK | |
| June 1, 1922 | $1,000 |
| January 2, 1923 (canceled July 1, 1930) | 98,000 |
| January 2, 1923 | 100,000 |
| November 11, 1924 | 100,000 |
| July 1, 1930 | 73,000 |
| PREFERRED STOCK | |
| January 2, 1923 | $100,000 |
| December 31, 1923 | 50,000 |
| January 2, 1927 (canceled July 1, 1930) | 100,000 |
*1375 As indicated in the above tabulations, petitioner turned in to the company $98,000 par value of common stock, and $100,000 par value of preferred stock on July 1, 1930. In addition*1397 to the above listed stock petitioner paid for $1,000 par value of common which was issued to two individuals to qualify them as directors. The above listed issues of capital stock were charged to petitioner's account on the company's books, with the exception of the $100,000 par value issue of November 11, 1924. That stock had previously been issued to the German holders of the patents under which petitioner proposed to operate in this country. Petitioner had secured an interest in the German concern in 1922 at a cost of $17,812.50. In 1924 he surrendered that interest in exchange for the $100,000 stock held by the Germans. Petitioner at all times had control of the Haberland Manufacturing Company through the ownership of a majority of the outstanding stock.
The Haberland Manufacturing Company's indebtedness to petitioner as shown by its balance sheets, under the heading "Loaned by Paul Haberland," was as follows at the close of each of several years:
| Year | Amount |
| 1922 | $298,186.70 |
| 1923 | 111,924.86 |
| 1924 | 117,911.55 |
| 1925 | 139,503.21 |
| 1926 | $138,515.95 |
| 1928 | 123,301.67 |
| 1929 | 147,286.22 |
| 1930 | 66,288.10 |
In April, 1922, petitioner contracted to buy land*1398 in New Jersey for the use of the Haberland Manufacturing Company. The plant was constructed in 1922, the machinery was received in October, and the company was ready to begin and actually began manufacturing on November 1, 1922. Up to that date petitioner had advanced to the company a net amount of $216,064.20. Up to January 31, 1923, his net advances amounted to $356,163.83. In November, 1921, and again in June, 1922, petitioner went to Europe for the purpose of selecting and buying machinery and of further acquainting himself with the uses of the new starch in the textile industry. All of the time that elapsed between the incorporation of the Haberland Company and the date it was ready to operate was needed in view of the fact that intricate machinery had to be made abroad and imported.
The Haberland Manufacturing Company's principal product, sold under the trade name "Hamaco," was a dry product consisting of starch and certain chemicals and disinfectants. It was sold to textile *1376 mills for use in making sizing. In making a complete sizing the mills added starch and water to the Hamaco. Since 1927 the company has also manufactured a complete sizing material*1399 which requires only the addition of water and boiling, and also a casein glue, which is supplied to aircraft manufacturers and is used by the textile industry in glueing of bobbins.
The principal product, Hamaco, relieved the users of it of considerable expense and of the inaccuracies attendant upon their own mixing of a sizing base. Hamaco is advertised in the American Wool and Cotton Reporter, a trade journal of the textile industry. From 1923 to 1927 something over 70 per cent of the Hamaco produced was sold to the textile industry and of this percentage more than one-half was used by manufacturers of woolen and worsted goods. The Garfield Worsted Mills was one of the Haberland Company's customers until 1926. Other customers, and the products they manufactured, were: Julius Forstmann & Co., worsted, silk, and mixed rayon goods; Pacific Mills, worsted dress goods; Dominion Textile Co., Ltd., cotton goods; Roxbury Carpet Co., carpets; Nashua Manufacturing Co., wool blankets; Farr Alpaca Co., wool goods; Berkshire Fine Spinning Associates, Inc., fine cotton goods; Joseph Benn Corporation, worsted lining. The remaining 30 per cent of the Hamaco produced was sold to one manufacturer*1400 for use in treating felt for acoustical purposes.
In 1922 the Haberland Manufacturing Compoany had about eight employees, beginning with 1923, and each year since then, it has employed about thirty people. Two employees are engaged in making casein glue at the rate of about 300 pounds per day. The Haberland Company's production of sizing material is about 8,000,000 pounds annually.
Prior to 1924 it was the general practice of textile mills to make their own sizing.
Petitioner did not place the proceeds of the sale of his stock in a replacement fund.
On May 14, 1922, petitioner filed an income-tax return for the year 1918. The deficiency notice relating to the year 1918, upon which the present proceeding is based, was mailed April 28, 1927.
OPINION.
ARUNDELL: Several of the questions involved in the present step in this proceeding may be disposed of without much discussion. The first is the question of the statute of limitations. We fail to see any merit in the petitioner's contention that the statute has run against assessment and collection. His return for 1918 was *1377 filed on May 4, 1922, and the deficiency notice was issued April 28, 1927, less*1401 than five years after the date of filing. Petitioner argues that he was not taxable for the year 1918 and was not required to file a return. Whether he was taxable or not, he had sufficient income in 1918, as held in our previous report, to require the filing of a return. To the argument that the Alien Property Custodian should have filed a return for petitioner in 1919, it is a sufficient answer to point out that the Custodian did not do so. As far as we know, the Custodian has not yet filed a return on behalf of the petitioner, and if we are to base our decision on the premise that he should have done so, the present proceeding would resolve itself into a "no return" case with a consequent lengthening of the limitation period.
Petitioner produced no evidence whatsoever on the issue of the March 1, 1913, value of the common stock. The respondent determined that value to be $130 per share, and in the absence of any evidence we are bound to treat that figure as correct.
Petitioner claims, in the event that he does not prevail on the other issues, that the tax on the profit on the sale of his stock should be limited*1402 under section 18(c) of the Settlement of War Claims Act of 1928, which provides that:
So much of the net income of a taxpayer * * * as represents gain derived from the sale or exchange by the Alien Property Custodian of any property * * * seized by him, may at the option of the taxpayer be segregated from the net income and separately taxed at the rate of 30 per centum.
In his brief counsel for respondent concedes that petitioner's case comes within the above quoted statutory provisions, that petitioner made a timely election, and that he is "entitled to have the capital net gains arising from the seizure and sale of his property by the Alien Property Custodian segregated and taxed at 30 per centum."
We have left, then, the question of whether petitioner is entitled to deduct from the gain on the sale of his Garfield Worsted Mills stock so much thereof as he subsequently invested in the Haberland Manufacturing Company. The pertinent provisions of the statutes are set out in the margin. *1378 and sold by the Alien Property Custodian shall be treated as compulsorily or involuntarily converted, and that where the taxpayer proceeds*1403 forthwith and in good faith to expend the proceeds of the conversion to acquire other property "of a character similar or related in service or use," or to acquire 80 per cent or more of the stock of a corporation owning "such other property," then a deduction shall be allowed of a portion of the gain derived.
*1404 In approaching the question for decision here it must be borne in mind that the sections of the statutes quoted in the margin are relief provisions (
Having this purpose of the statute in mind, we are of the opinion that petitioner's investment in the Haberland Company should be treated as taking the place of the Garfield stock if it otherwise meets the requirements of the statute. While the sums that he put into the new business were treated on the corporate books in the first instance as loans, it is shown by the evidence that petitioner intended to have stock issued to him from time to time to take the place of the loans. His intention in this respect was carried out to the extent that, beginning with January 2, 1923, the net amount of the advances was largely covered by stock issued at various times and charged to his account. At the beginning of 1923 his balance was $298,186.70 and on January 2 stock of the par*1405 value of $298,000 was issued to petitioner. By the end of 1924 his stock holdings amounted to $449,000, an amount not far below the net proceeds realized from the conversion of his Garfield stock. In these circumstances, it is our opinion that the advances made by petitioner out of the proceeds of the involuntary conversion of his stock should be treated as expenditures in the acquisition of other property, within the meaning of the revenue act.
The respondent places considerable stress on the fact that petitioner purchased sundry securities between October 26, 1921, and January 25, 1922. We attach no significance to those purchases as *1379 the evidence shows that petitioner purchased them only as a temporary investment and intended to and did convert them into cash as and when he needed funds for the promotion of his new business. It is hardly to be expected that a fund approaching a half million dollars would be left lying idle for any considerable length of time, and petitioner apparently knew that some time must elapse before the new business could be organized and ready for operation. It was only natural that under the circumstances he should temporarily put his*1406 funds in income-producing securities.
If section 214(a)(12) of the Revenue Act of 1921 limited the acquisition to "similar" property, we might have some difficulty in finding that the petitioner's investment met the test, inasmuch as the Haberland Company's activities were similar to only one phase of those of the Garfield Worsted Mills. But the word "similar" is followed immediately by the phrase "or related," which, in our opinion, considerably broadens the scope of the statute and gives the taxpayer more latitude in making an investment than is contended for by the respondent in this case. The evidence establishes that the use of sizing is essential to the textile industry. Prior to the time that the Haberland Company's products came on the market it was the practice of textile mills to make their own sizing. The Garfield Worsted Mills had about 15 employees engaged in the making of sizing for its own use. The Haberland Company's customers were mostly textile mills which used its products in place of the sizing they had previously made. Only one exception is shown, and that is in the use of Hamaco to treat felt, which it would seem is not a far cry from the treatment of*1407 fabrics in the strictly textile business. In our opinion the business of the Haberland Manufacturing Company was "related to" that of the Garfield Worsted Mills within the meaning of the statute.
One of the requirements of the statute is that the proceeds of the conversion must be expended "forthwith." We had occasion to examine into this requirement to some extent in
Immediately; without delay; directly; hence, within a reasonable time under the circumstances of the case; promptly and with reasonable dispatch; - the meaning of the term in a particular case is relative to the circumstances.
Also, Bouvier's definition, cited with approval in
It is shown by the account books of the Haberland Manufacturing Company that petitioner continued to advance funds to or for it during all the years from 1921 to 1930, inclusive. Prior to the opening *1380 of petitioner's*1408 account on the company's books in April, 1922, he had advanced certain sums as shown by his check stubs. Advances thereafter purport to be recorded on the check stubs and also credited to his account on the company's books. The two records are not in agreement and it is impossible to determine from them the total amount advanced, but it appears that the total from 1921 to 1930, inclusive, was somewhere in the neighborhood of $500,000. Counsel for the petitioner computed the total amount advanced between November 3, 1921, and September 19, 1928, as $498,125.02. Granting that this aggregate is correct, it does not appear that the net amount of his advances was as much as that at any time. The credit to his account for advances was offset by numerous charges, in addition to stock issued, which for the most part are unexplained. In 1922, according to the company's ledger, petitioner's advances totaled $331,840.10, but this was offset by various charges which at the end of the year left a balance in his favor of $298,186.70. By the end of 1923 his balance was reduced on the books to $16,783.09. There is an unexplained discrepancy between petitioner's account on the books and the*1409 company's balance sheet which lists among its liabilities $111,924.86 as "loaned by Paul Haberland." Similar unexplained discrepancies appear in each of the years 1926, 1928 and 1929.
But passing these matters, we are of the opinion that not all of petitioner's expenditures, extending as they did over a period of nine years, can be said to have been made "forthwith." "A word * * * is the skin of a living thought * * *."
We are of the opinion, however, that at least a portion of petitioner's advances were made sufficiently soon after realizing the proceeds to come within the statute. He received the proceeds of the conversion*1410 on October 26, 1921, and on November 3, 1921, he caused the Haberland Manufacturing Company to be incorporated. The necessary ground for a plant was selected and construction begun in April, 1922. By the first of November, 1922, the plant was ready to, and did, begin operations. In the meantime petitioner found it necessary to make two trips abroad to select machinery and transact other business for the new corporation. We are convinced by petitioner's testimony that, considering all the circumstances, the *1381 Haberland Manufacturing Company was organized and started to operate as quickly as was practicable. In our opinion the expenditures made by petitioner up to the time the company began operations and within ninety days thereafter may properly be considered as having been made under the conditions specified by the statute. The sums advanced during the first ninety days of operations were for the most part in large amounts which apparently were reasonably necessary to start operations, and hence were a part of petitioner's initial investment in the business. Thereafter the advances were in relatively small amounts until the latter part of 1923, which under the circumstances*1411 here we consider too remote to come within the statute. The amount we are able to determine may not be exactly the amount expended, but is based on what we consider the most satisfactory evidence offered. Petitioner read into the record a number of expenditures made as shown by his check stubs. While some of these were made prior to the opening of his account on the company's books, we do not know whether or not they were later taken up in the accounts under some of the indefinite descriptions given to a number of the credit items. On the other hands, the ledger account contains credits for which there do not appear to be corresponding check stubs. In this situation we have chosen the ledger account as being more likely to be an accurate reflection of what actually occurred, particularly in view of the fact that it contains charges as well as credits to petitioner's account. According to the ledger account, petitioner advanced a gross amount of $397,283.47 up to January 31, 1923. During the same period he was charged with $340,119.64, which included charges of $299,000 par value of stock and which should not be used as an offset as it represented a part of petitioner's investment*1412 in the business. The difference between the gross amount advanced, $397,283.47, and the net charges of $41,119.64, or $356,163.83, in our opinion, may properly be said to have been expended forthwith in the acquisition of property of a character related in use or service to that involuntarily converted and a deduction may be allowed on that basis.
While it does not appear pertinent to the issues here, it may not be amiss to record that at the hearing petitioner agreed to the terms of Article VI of
Reviewed by the Board.
1. [Section 214(a)(12), Revenue Act of 1921.] If property is compulsorily or involuntarily converted into cash or its equivalent as a result of (A) its destruction in whole or in part, (B) theft or seizure, or (C) an exercise of the power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted, or in the acquisition of 80 per centum or more of the stock or shares of a corporation owning such other property, or in the establishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. * * *
[Section 18(d), Settlement of War Claims Act of 1928.] Any property sold or exchanged by the Alien Property Custodian (whether before or after the date of the enactment of the Settlement of War Claims Act of 1928) shall be considered as having been compulsorily or involuntarily converted, within the meaning of the income, excess-profits, and war-profits tax laws and regulations; and the provisions of such laws and regulations relating to such a conversion shall (under regulations prescribed by the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury) apply in the case of the proceeds of such sale or exchange. For the purpose of determining whether the proceeds of such conversion have been expended within such time as will entitle the taxpayer to the benefits of such laws and regulations relating to such a conversion, the date of the return of the proceeds to the person entitled thereto shall be considered as the date of the conversion. ↩