1928 BTA LEXIS 3901">*3901 1. A deduction for amortization of the building erected and used by petitioner in the production of articles contributing to the prosecution of the war is only allowable within the amortization period beginning on the date when the building first became useful.
2. It appears that the principal stockholders were not all personally active in the affairs of petitioner and, in addition, the net incomes attributable to the claimed separate businesses can not be satisfactorily determined; held, petitioner does not come within the provisions of section 303 of the Revenue Act of 1918.
3. Amounts of taxes paid but not assessed should be considered in computing the statutory deficiency.
10 B.T.A. 1329">*1329 This proceeding results from the determination by respondent of a deficiency in income and profits taxes for the calendar year 1918, amounting to $29,939.18. Petitioner alleges error with reference to the following issues: (1) Petitioner is entitled to and has not been allowed a deduction from gross income for the amortization of the cost of buildings1928 BTA LEXIS 3901">*3902 and facilities, as provided in section 234(a) (8) of the Revenue Act of 1918; (2) the net income of petitioner was in part derived from a business within the class of personal 10 B.T.A. 1329">*1330 service corporations and the taxes shoulo be computed as provided in section 303 of the Revenue Act of 1918; (3) in computing the amount of the deficiency respondent has not considered the aggregate of the payments made to the collector for 1918 income and profits taxes.
FINDINGS OF FACT.
Petitioner is a Maryland corporation with its principal office at Aberdeen, and was incorporated on June 14, 1911, following the purchase by William Silver of the business of Strasbaugh, Silver & Co., a partnership which had just dissolved. Petitioner was and is the owner of 97 per cent of the outstanding capital stock of four corporations: Colora Canning Co., Cheswold Canning Co., Henderson Canning Co. and Trappe Canning Co. The taxes for 1918 were determined on the basis of a consolidated return, and the deficiency is that of the entire affiliated group. One business of the parent corporation was that of a broker and commission merchant of canned goods. In addition, the parent corporation was a holding1928 BTA LEXIS 3901">*3903 company owning the capital stock of the subsidiary corporations and loaning them working capital according to their needs. Petitioner sometimes bought and sold canned goods for its own account when the demand exceeded the output of the subsidiary canneries. The subsidiary corporations were packers of canned goods. The Cheswold plant was leased and operated by another party in 1918.
The sales on a brokerage basis largely resulted from the personal activity and influence of William Silver, a man of long experience and extensive acquaintance in the canned goods field, and formerly a member of the predecessor partnership. Silver was a stockholder and he was treasurer and general manager of petitioner in 1918. His duties were to handle the finances and personally to travel and solicit business, selling in this way a major portion of the goods sold by petitioner. Silver was the only salesman in 1918. The sales on a brokerage basis were ordinarily for the account and at the financial risk of the packers. Collection of the account of the buyer was reserved by petitioner in order to ensure the prompt realization of the brokerage. The financial responsibility of the buyer was guaranteed1928 BTA LEXIS 3901">*3904 at times by petitioner. In 1918 due to war-time conditions, it was necessary for petitioner to extend financial aid to the packers in the form of advances sometimes amounting to about 50 per cent of the value of the goods actually in transit to buyers. Cash for this purpose was derived in part from loans of $25,000 for two months from one bank, and $50,000 for three months from another bank.
10 B.T.A. 1329">*1331 The following facilities were purchased and were used in the 1918 packing:
| Colora Plant: | |
| Building for housing employees, cost | $415.60 |
| 2 Husking machines, cost | 800.00 |
| Henderson Plant: Tomato filler, cost | 686.00 |
| Trappe Plant: | |
| Water tank and tables, cost | 209.95 |
| Scales, cost | 110.00 |
These facilities were used to some extent in 1919, but not thereafter. The husking machines were subsequently loaned to another packer without charge. The facilities were not sold.
Prior to February, 1918, petitioner owned and occupied a shingled, frame office building at Aberdeen, Md., which had been in use since 1903. It was totally destroyed by fire early in February, 1918, together with the petitioner's books of account and records of transactions prior to February 5, 1918.
1928 BTA LEXIS 3901">*3905 After the fire petitioner occupied such small, inadequate office quarters as were available, but it was greatly handicapped. In October, 1918, the construction of a new frame and shingle office building, in dimensions 30 feet by 60 feet, was begun. The building was completed at a cost of $24,508.13 in the spring of 1919, subsequent to the date of the filing of the income-tax return of petitioner. The office building was used by the treasurer and general manager, and by five other employees, one of whom had charge of the accounting, another assisted Silver in corresponding relative to sales, two were stenographers and one was a storekeeper and shipping clerk handling small supplies. The building is still in use by petitioner for office purposes.
| Stockholders in 1918 | ||
| Name | Office and services | Shares |
| owned | ||
| INACTIVE | ||
| F. J. Stokes | President of petitioner. Occasional adviser | 150 |
| Joseph H. Kerrick | Vice president, no services | 60 |
| E. J. Kerrick | No services | 115 |
| Mrs. A. H. Kerrick | do | 25 |
| H. A. Osborn | Secretary (engaged in another business in | |
| Aberdeen), part-time adviser. | 100 | |
| Subtotal | 450 | |
| ACTIVE | ||
| Wm. Silver | Treasurer and manager, active for full time | 1,550 |
| Total | 2,000 |
1928 BTA LEXIS 3901">*3906 During 1918 petitioner was engaged for a part of the time in furnishing canned goods to the Government under contract and its 10 B.T.A. 1329">*1332 deliveries under its contract amounted to $140,000 for the year 1918, and $440,000 for the year 1919.
At the end of each year the entire profit and/or loss of each of the subsidiaries was transferred to the general factory account on books of William Silver & Co., from which account it was transferred to that parent company's profit and loss account. No dividends, as such, were declared by the subsidiary companies.
Petitioner submitted in evidence the revenue agent's report dated May 1, 1923, which shows the following:
| Name | Brokerage and commission to Wm. Silver & Co. | Insurance premiums to Wm. Silver & Co. | Interest paid to Wm. Silver & Co. |
| Colora Canning Co | $6,650.19 | $303.09 | $571.51 |
| Chiswold Canning Co | 36.56 | ||
| Henderson Canning Co | 4,275.03 | 508.76 | 1,055.59 |
| Trappe Canning Co | 4,271.09 | 713.26 | 1,179.42 |
| Total | 15,196.31 | 1,561.67 | 2,806.52 |
Grand total, $19,564.50.
Petitioner included the amount of $19,564.50 in its computation of its gross income from its brokerage business, and the Commissioner eliminated1928 BTA LEXIS 3901">*3907 the said amount as intercompany transactions. The said revenue agent's report also shows the following:
| Name | Net income | Loss |
| Wm. Silver & Co | $13,674.23 | |
| Chiswold Canning Co | $457.90 | |
| Colora Canning Co | 20,930.66 | |
| Henderson Canning Co | 19,848.98 | |
| Trappe Canning Co | 9,905.55 | |
| Total | 64,359.42 | 457.90 |
| 457.90 | ||
| Net income | 63,901.52 |
Petitioner made payments to the Collector of Internal Revenue, Baltimore, Md., for income and profits tax for 1918, as follows: Check #400, $2,678.28; Check #482, $2,678.28; Check #576, $2,678.28; and Check #690, $2,678.29, or an aggregate of $10,713.13.
A consolidated return was filed for the year 1918, in which a deduction amounting to $3,827.37 was claimed for amortization of war facilities, and the taxes were computed on the partial personal service basis under section 303. The Commissioner disallowed the claim for amortization; computed the taxes without reference to section 303; and determined the total tax assessable to be $34,691.11, which has been reduced by an original assessment of $4,751.93, leaving the asserted deficiency in the amount of $29,939.18.
10 B.T.A. 1329">*1333 OPINION.
TRUSSELL: The first issue relates1928 BTA LEXIS 3901">*3908 to a claim by petitioner for a deduction from gross income on account of amortization under section 234(a)(8) of the Revenue Act of 1918.
The chief item in the claim arises from an office building which was erected to take the place of one destroyed by fire. Petitioner claims the right to a deduction of the excess of the total cost over the replacement value in 1921, 1922 and 1923.
We have discussed before the general purpose of the amortization allowance, see ; ; ; ; and , and we will not extend this report by a repetition thereof. In the instant case we are considering solely the year 1918. The office building was not begun until as late as October, 1918, nor was it fully completed until the spring of 1919. One witness testified that the amount of the deduction for amortization claimed in the return for 1918 was based upon the cost according to the books on December 31, 1918, amounting to approximately $7,200, which is less1928 BTA LEXIS 3901">*3909 than one-third of the total cost. After making full allowance for the probability that the construction of the office building had progressed somewhat further than the books indicated on December 31, 1918, and also allowing for the possibility that the office building may have been used by petitioner prior to the completion in all of its details, we are, nevertheless, confronted with the impossibility of finding from the record that the building was actually used during any part of the calendar year 1918. In Hawaiian Steamship Co., supra, we held that "the purpose of the statute was clearly to allow the deduction for amortization against war income which was produced while the amortizable asset was an income producing factor."
Viewing the amortization period during which allowances would be applicable for the office building as beginning with the day when the building became of use, we are not satisfied that any part of the amortization period fell within the calendar year 1918. This is sufficient for a conclusion that respondent should be sustained without going into the question of the amount, if any, of amortization allowable on this building, which, as a matter1928 BTA LEXIS 3901">*3910 of fact, was constructed and was used largely for purposes other than the production of articles contributing to the prosecution of the war.
The cost of a small shed or building and of several articles of equipment are detailed in the findings of fact. The assets were never definitely abandoned and there is no satisfactory evidence of their salvage or useful value. Respondent sustained.
10 B.T.A. 1329">*1334 The second issue relates to a computation of the profits taxes under section 303 of the Revenue Act of 1918, providing as follows:
That if part of the net income of a corporation is derived (1) from a trade or business (or a branch of a trade or business) in which the employment of capital is necessary, and (2) a part (constituting not less than 30 per centum of its total net income) is derived from a separate trade or business (or a distinctly separate branch of the trade or business) which if constituting the sole trade or business would bring it within the class of "personal service corporations," then (under regulations prescribed by the Commissioner with the approval of the Secretary) the tax upon the first part of such net income shall be separately computed1928 BTA LEXIS 3901">*3911 (allowing in such computation only the same proportionate part of the credits authorized in sections 311 and 312), and the tax upon the second part shall be the same percentage thereof as the tax so computed upon the first part is of such first part: Provided, That the tax upon such second part shall in no case be less than 20 per centum thereof, unless the tax upon the entire net income, if computed without benefit of this section, would constitute less than 20 per centum of such entire net income, in which event the tax shall be determined upon the entire net income, without reference to this section, as other taxes are determined under this title. The total tax computed under this section shall be subject to the limitations provided in section 302. (Italics supplied.)
Petitioner contends that the brokerage business of the parent corporation was a distinctly separate branch which standing alone would be classified as a personal service corporation. The requirements for a personal service classification under section 200 of the Revenue Act of 1918 are threefold: (1) The income of the corporation must be ascribed primarily to the activities of the principal owners1928 BTA LEXIS 3901">*3912 or stockholders. (2) Such principal owners or stockholders must themselves be regularly engaged in the active conduct of the affairs of the corporation. (3) Capital (whether invested or borrowed) must not be a material income-producing factor. Taking up for consideration the stockholders, we find there were but six during the taxable year and five of them held 450 shares out of the 2,000 shares of capital stock outstanding. Four of them, even though inclusive of the president and the vice president, were inactive in the affairs of petitioner. The fifth, the secretary, was engaged in another business and we are not satisfied that he gave his time and energy in substantial measure to the affairs of petitioner. In our opinion the aggregate and the character of the inactive stockholding interest are so important as to eliminate petitioner from classification as a personal service corporation. Cf. .
There are further grounds for sustaining respondent, but, in view of our conclusion above, it is unnecessary to do more than mention them.
10 B.T.A. 1329">*1335 We have italicized the references to net income in section 303 in1928 BTA LEXIS 3901">*3913 order to bring out clearly the vital necessity of accurately ascertaining the net incomes attributable to the separate businesses. The net income claimed by petitioner attributable to the brokerage business is far from accurate for it includes intercompany transactions with the subsidiaries, and, furthermore, expenses aggregating $22,062.72 are apportioned and deducted pro rata on a basis of the respective gross profits incorrectly computed. We are left to conjecture what were the expense items entering into the aggregate and what were their relations to gross profits. We do not feel at liberty to accept the conclusion of petitioner that it was impossible to charge these expenses directly to some proper designation. Cf. .
The revenue agent's report dated May 1, 1923, submitted in evidence by petitioner, shows that the parent corporation had a net income in the amount of $13,674.23 for the year 1918, and that the affiliated group had a total net income in the amount of $63,901.52 which for all practical purposes was the income of the petitioner parent corporation. The subsidiaries did not declare dividends, but at the end1928 BTA LEXIS 3901">*3914 of each year transferred all their profits and/or losses to the books of the parent company. The parent company which was engaged primarily in the conduct of the brokerage business had a net income which amounted to approximately 21.3 per cent of the total net income of the entire business of the affiliated group and such percentage is less than the 30 per cent required by section 303 of the Revenue Act of 1918.
Upon all the facts and circumstances of record we are of the opinion that petitioner is not entitled to the benefits of section 303 of the Revenue Act of 1918. Cf. .
Relative to the third issue, it is in evidence and uncontroverted that payments of taxes made by petitioner for the year 1918 aggregated $10,713.13. It appears that in computing the amount of the deficiency in dispute, respondent credited an amount of $4,751.93 as the original assessment and apparently he has made no further credits or deductions for the full amount of $10,713.13 paid. Respondent should correct that apparent mathematical error or else show to the Board, in his recomputation made pursuant to this decision, that all proper1928 BTA LEXIS 3901">*3915 credits have been given for the amount of $10,713.13 taxes paid.
Judgment will be entered upon 15 days' notice, pursuant to Rule 50.