Glenmore Sec. Corp. v. Commissioner

GLENMORE SECURITIES CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Glenmore Sec. Corp. v. Commissioner

Docket Nos. 40255, 46666, 50559.

United States Board of Tax Appeals

24 B.T.A. 697; 1931 BTA LEXIS 1608;

November 10, 1931, Promulgated

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1. A syndicate which was not a taxable entity under the revenue acts earned net income which was not distributed during the years when earned. The time of making such distribution was, by agreement of the members, left to the discretion of one of their number, who was the syndicate manager. Held, the distributive net earnings of the syndicate constituted taxable income to the members in proportion to their respective interests.

2. In 1925 a syndicate earned, net, and distributed to its members, an amount greater than the amount of its capital. The respondent determined that such distribution was a division of profits and not return of capital. Held, respondent's determination was not disproved by the fact that the syndicate manager called such distribution a return of capital, and interest.

Lawrence A. Baker, Esq., and Henry Ravenel, Esq., for the petitioner.

John D. Foley, Esq., and James Maddox, Esq., for the respondent.

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MARQUETTE

These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in income taxes asserted by the respondent as follows: For the year 1925, $5,518.65; for the year 1926, $1,682.93; for the year 1927, $763.49. The error assigned in each proceeding is that respondent has erroneously added to petitioner's income amounts alleged to have been constructively received from a certain syndicate.

FINDINGS OF FACT.

The petitioner is a corporation, with its principal office at 24 Broad Street, New York City.

In 1924 and 1925 the petitioner invested $40,000, with accrued interest amounting to $395.83, in the Carbarn Syndicate, and was a member of that syndicate throughout the years 1925, 1926 and 1927. The investment was made pursuant to a written agreement, of which the pertinent provisions are as follows:

AGREEMENT, made this 11th day of November, 1924, by and between GLENMORE SECURITIES CORPORATION, hereinafter designated as the "Subscriber", party of the first part, and

REALTY ASSOCIATES and BING AND BING, INC., corporations organized under the laws of the State of New Yrok, hereinafter designated as the "Manager", party of the second part,

WITNESSETH -

WHEREAS, the Manager has caused to be purchased from THE BROADWAY AND SEVENTH AVENUE RAILROAD COMPANY, in Block Number 1003 on the land map of the City of New York, bounded and described substantially as follows: * * *; and

WHEREAS, the said Subscriber desires to become a member of a Syndicate to be known as "Carbarn Syndicate", organized by the Manager to pay for, own and develop the premises hereinbefore described, and the parties hereto desire that the said Manager shall be vested with the complete and exclusive power to establish and change from time to time the amount of moneys constituting a fund to be known as "Carbarn Syndicate Fund" with like power to sell or exchange the said premises or any part thereof and execute and deliver deed upon the sale or exchange of said premises or any part thereof and to mortgage the same, and with like power to manage, operate, develop and control the said premises;

NOW, THEREFORE, in consideration of the premises and the mutual promises of the parties hereto, and the sum of ONE DOLLAR by each party to the other in hand paid, receipt whereof is severally acknowledged, the parties hereto severally agree with each other as follows:

FIRST: The amount of the moneys to constitute said Carbarn Syndicate Fund shall be determined solely by the Manager and shall be increased or diminished in amount from time to time and at any time as determined by the Manager in its sole discretion. The party of the first part for itself, its successors and assigns hereby subscribes and agrees with the Manager that it will contribute from time to time to the said Carbarn Syndicate Fund, FIVE PER CENTUM 5% of such fund, which percentage of such fund shall be paid by the Subscriber to the Manager at such times and in such amounts as the Manager calls for.

* * *

It is the intention of the parties that this agreement shall give the Manager all the power and suthority that it would have if it were the sole owner of the entire above described premises and the same power and authority that any individual would have if he were the sole owner of the said premises, and the Manager shall not be prevented from taking any action affecting or relating to said premises unless specifically prohibited herein. The Manager shall not be liable for any action taken under this agreement unless guilty of malfeasance.

FOURTH: This agreement shall continue in force and operation until the said Carbarn Syndicate is finally terminated at the option of the manager, when notice thereof will be given to the members of the said Syndicate, and upon being so terminated there shall be a distribution of all assets and profits, though there may be a partial distribution at any time prior thereto in the discretion of the Manager. At the time of such termination, the Manager in making the distribution shall first be credited with its disbursements in connection with acquiring, selling, managing, operating, developing and improving said premises. Thereafter, it shall return to each Syndicate member the amount actually paid in by each member of the Syndicate together with simple interest thereon at the rate of six per centum per annum. Thereafter, the Manager shall retain twenty-five per centum of the total net profits resulting from the operation of this agreement for the services rendered by it as Syndicate Manager, and without other charge or deduction except as aforesaid, the Manager shall pay over and distribute to the parties thereto, proportionately to their respective investments, all other net assets, profits and other benefits owned by or accruing to said Syndicate.

FIFTH: The Syndicate Fund shall include as a part thereof the moneys now actually invested by the Manager on account of the purchase price and acquiring of said above described premises.

SIXTH: This agreement is a counterpart of an agreement signed and executed by the Manager with each member of the Syndicate, excepting as to the percentage subscribed by each member as set forth therein. If, when and as all counterparts are duly signed, sealed and delivered by the respective parties, this agreement shall be in full force and effect. Such fact shall be certified in writing by the Manager to each of said members of the Syndicate.

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EIGHTH: This agreement shall bind and benefit ratably according to the amounts of their several subscriptions the parties hereto and their respective legal representatives, successors and assigns.

IN WITNESS WHEREOF, this agreement has been duly signed and executed by the parties hereto the day and year first above written.

The funds of the Carbarn Syndicate were kept in a separate account, but disbursements on account of the syndicate were made by Realty Associates from its own funds. In October, 1925, petitioner received Realty Associates' voucher check for $42,197.50, which bore the following notation:

14226.

Return of investment [sic], in Carbarn Syn. with interest on advances to 10/26/25.

$42,197.50.

The petitioner received nothing from the Carbarn Syndicate during 1926 or 1927. The total amount distributed to syndicate members in 1925 was $845,016.23.

The petitioner kept its books and made its income-tax returns on the cash receipts and disbursements basis during all of the years in question. For the year 1925 petitioner returned $1,801.67 as income received from the Carbarn Syndicate, but made no return of any income from the syndicate for either 1926 or 1927. The respondent has determined the net income of the syndicate and the taxable distributive share of the petitioner, as follows:

Year	Net income of syndicate	Distributable to petitioner
1925	$817,293.56	$40,864.68
1926	254,246.21	12,712.31
1927	119,552.34	5,977.61

In computing the net income of the syndicate the respondent allowed a deduction for the year 1925 in the amount of $272,431.18 as syndicate manager's fee, but made no allowance for that purpose for either of the years 1926 or 1927.

OPINION.

MARQUETTE: The plan and terms upon which the Carbarn Syndicate was organized are essentially the same as the plan and terms of Brighton Syndicate No. 1, and the Brighton Beach Hotel Syndicate. Respecting the latter two, we held in , that net profits of the syndicate constituted taxable income to the members for the years when earned, even though such profits were not then distributed by the managing member of the syndicates. The basis of that decision applies in this proceeding as to profits earned but not distributed by the Carbarn Syndicate in 1926 and 1927. See also ; . On that point, therefore, we sustain the respondent's determination.

The petitioner's second point is, that of the amount received by it from the syndicate in 1925, $40,395.83 was a return of capital and not taxable. The respondent has determined that the entire amount was distributed from profits and constituted taxable income.

The petitioner's contention is based upon a theory that under the syndicate agreement no member can derive taxable income until he has first received back the capital he invested.

The agreement itself does not expressly require a return of capital before any distribution of profits, except at the termination of the syndicate. The distribution in question was made before the syndicate terminated.

To support its theory as to the legal effect of the syndicate agreement, petitioner relies strongly upon the case of . In that case the court was dealing with the question of gain or loss from the sale or other disposition of property, with respect to its March 1, 1913, value. The property in question consisted of shares in a mining company. The shares were sold for a consideration which, in part, consisted of a promise of future payments wholly contingent upon uncertain facts and circumstances. The court held that such promise was not the equivalent of cash, and had no ascertainable fair market value; that the transaction was not a closed one, and the taxpayer might never recoup her capital investment from payments only conditionally promised; and therefore "she properly demanded the return of her capital investment before assessment of any taxable profit based on conjecture."

The distinction between the case cited and the present proceeding is quite apparent. We are not here considering any question of gain or loss from the sale of property, but only whether a distribution from a fund consisting of invested capital and a somewhat larger amount of net profits shall be deemed a division of the profits or a return of capital. The two questions are not in the same category. To follow the Logan decision, supra, in the present proceeding would require us to ignore the widely different circumstances of the two cases, and to hold in effect that there can be no profit derived from any business enterprise, however long continued and however great its earned surplus, until all the invested capital has been returned to the investors. We do not consider that the Logan decision justifies such a proposition, nor do we consider that decision applicable to the facts before us.

It is not disputed that the net income of the syndicate for the year 1925 amounted to $817,293.56. The business enterprise carried on by the syndicate was not terminated in 1925, but continued thereafter for several years and earned a substantial net income in 1926, and also in 1927. The syndicate, although not a corporation, earned income by the use of capital. The respondent has determined that the amount distributed to members in 1925 was not a return of capital. The only evidence offered to disprove the correctness of that determination was that in making the distribution the major portion of the amount was denominated as capital by the syndicate manager. Standing alone, as it does, that evidence is not sufficient to overcome the respondent's determination.

Although it appears that in 1925 there was distributed to members $27,722.67 more than the net earnings of the syndicate for that year, we are unable to say whether the amount in excess of earnings was taken from capital, or whether it represented net earnings prior to 1925. The record is silent on that point.

Reviewed by the Board.

Judgment will be entered for the respondent.