Decisions will be entered under Rule 50 in docket Nos. 1317-67, 1337-67, 1338-67, 1339-67, 1340-67, and 1359-67.
Decisions will be entered for petitioners in docket Nos. 1314-67, 1315-67, 1316-67, 1360-67, and 1361-67.
1. Held, Commissioner's allocations under sec. 482, I.R.C. 1954, approved in part and disapproved in part,
2. Held, Commissioner has failed to carry burden of proof to establish omission of more than 25 percent of gross income under sec. 6501 (e), I.R.C. 1954, in respect of fiscal 1961.
*240 The Commissioner determined the following deficiencies in petitioners' income taxes for the years indicated: *241
| Petitioner | Docket No. | TYE | Deficiency |
| Philipp Bros. Chemicals, Inc. (Md.) | 1314-67 | 2/29/60 | $ 5,500.00 |
| 2/28/62 | 5,485.70 | ||
| Philipp Bros. Chemicals, Inc. (R.I.) | 1315-67 | 11/30/60 | 5,500.00 |
| 11/30/62 | 5,500.00 | ||
| Philipp Bros. Chemicals, Inc | 1316-67 | 11/30/60 | 5,008.56 |
| 11/30/62 | 5,109.11 | ||
| Philipp Bros. Chemicals International Co., Inc | 1317-67 | 3/31/60 | 4,148.52 |
| 3/31/62 | 5,500.00 | ||
| Philipp Bros. Chemicals Trans-America Corp | 1337-67 | 3/31/60 | 2,180.99 |
| 3/31/62 | 1,444.86 | ||
| Philipp Bros. Chemicals Pan-American Corp | 1338-67 | 3/31/60 | 3,909.04 |
| 3/31/62 | 5,500.00 | ||
| Phibro International Corp | 1339-67 | 3/31/60 | 2,170.61 |
| 3/31/62 | 782.79 | ||
| Philipp Bros. Chemicals Export Corp | 1340-67 | 11/30/60 | 1,000.66 |
| 11/30/62 | 855.72 | ||
| Philipp Bros. Chemicals, Inc. (N.Y.) | 1359-67 | 6/30/60 | 101,072.44 |
| 6/30/61 | 93,035.89 | ||
| 6/30/62 | 102,781.12 | ||
| Philip Bros. Chemicals, Inc. (Mass.) | 1360-67 | 6/30/60 | 5,500.00 |
| 6/30/62 | 5,066.91 | ||
| Philip Bros. Chemicals, Inc. (Pa.) | 1361-67 | 2/29/60 | 5,500.00 |
| 2/28/62 | 5,500.00 |
*134 The parties have made certain concessions relating to the above deficiencies. The issues remaining are (1) whether the Commissioner properly allocated to the petitioner in docket No. 1359-67 the net income (with appropriate adjustments) of the other petitioners by virtue of section 482, I.R.C. 1954; (2) if the reallocation was properly made, whether the petitioner in docket No. 1359-67 omitted an amount exceeding 25 percent of its gross income reported in the year ended June 30, 1961, so that the period of limitations on the assessment and collection of the tax for said year has not expired under the provisions of section 6501(e), I.R.C. 1954; and (3) if the reallocation was improperly made, whether the petitioner in docket No. 1340-67 was properly denied a surtax exemption under section 269, I.R.C. 1954.
FINDINGS OF FACT
Certain facts have been stipulated by the parties and are incorporated herein by this reference. All of the petitioners filed all their Federal income tax returns for the years at issue with the district director of internal revenue in Manhattan, New York.
Philipp Bros., Inc., was a corporation engaged in extensive business activities involving metals and chemicals. *135 In 1945 or 1946 Charles H. Bendheim (Bendheim) acquired the chemicals department or business of that corporation. His father (S. Bendheim) and another person each owned 50 percent of the stock of Philipp Bros., Inc., and Bendheim's acquisition of the chemicals business was a consequence of his father's decision to retire and withdraw from the corporation. In May 1946 Bendheim formed Philipp Bros. Chemicals, Inc. (N.Y.), a New York corporation; it is the petitioner in docket No. 1359-67 and is hereinafter sometimes referred to as "New York." It is the principal corporation of the 11 petitioners involved in this proceeding that were *242 utilized by Bendheim to carry on the chemicals business. Shortly after New York had been incorporated the petitioner in docket No. 1360-67, Philipp Bros. Chemicals, Inc. (Mass.) (hereinafter sometimes referred to as "Massachusetts"), was organized on May 27, 1946, under the laws of Massachusetts as a wholly owned subsidiary of New York to conduct the chemicals business in the New England area. In July 1946, New York acquired all the stock of Philipp Bros. Chemicals, Inc. (Pa.) (hereinafter sometimes referred to as "Pennsylvania"), petitioner in docket *136 No. 1361-67, and all the stock of Philipp Bros. Chemicals, Inc. (Md.) (hereinafter sometimes referred to as "Maryland"), petitioner in docket No. 1314-67. "Pennsylvania" and "Maryland" had each been incorporated on March 22, 1944, under the laws of Pennsylvania and Maryland, respectively, as affiliates of Philipp Bros., Inc.
In 1950, three more of the petitioner corporations were formed. The petitioner in docket No. 1316-67, the Philipp Bros. Chemicals, Inc. (hereinafter sometimes referred to as "Connecticut"), was formed on November 26, 1950, under the laws of Connecticut. The petitioner in docket No. 1340-67, Philipp Bros. Chemicals Export Corp. (hereinafter sometimes referred to as "Export") was formed on December 20, 1950, under the laws of New York. The petitioner in docket No. 1315-67, Philipp Bros. Chemicals, Inc. (R.I.) (hereinafter sometimes referred to as "Rhode Island"), was formed on December 22, 1950, under the laws of Rhode Island. Connecticut and Rhode Island were formed to take over the chemicals business in their respective States which had previously been conducted by Massachusetts and which had substantially expanded by 1950.
In 1951, the remaining four petitioner *137 corporations were formed. On April 3, 1951, the petitioner in docket No. 1338-67, Philipp Bros. Chemicals Pan-American Corp. (hereinafter sometimes referred to as "Pan-American") was formed under the laws of New York as a Western Hemisphere trade corporation. On April 10, 1951, the petitioner in docket No. 1317-67, Philipp Bros. Chemicals International Co., Inc. (hereinafter sometimes referred to as "International"), was formed under the laws of New York. On April 11, 1951, the petitioner in docket No. 1337-67, Philipp Bros. Chemicals Trans-America Corp. (hereinafter sometimes referred to as "Trans-America") was formed under the laws of New York as a Western Hemisphere trade corporation. On April 13, 1951, the petitioner in docket No. 1339-67, Phibro International Corp. (hereinafter sometimes referred to as "Phibro") was formed under the laws of New York.
The shareholders of the petitioner corporations and the percentages of stock they owned were at all relevant times as follows: *243
| Bendheim | B. | New | |
| and | Landers 1 | York | |
| family | |||
| Percent | Percent | Percent | |
| New York | 89.9 | 11.1 | |
| Massachusetts | 100 | ||
| Pennsylvania | 100 | ||
| Maryland | 100 | ||
| Connecticut | 87.5 | 12.5 | |
| Rhode Island | 87.5 | 12.5 | |
| Export | 87.5 | 12.5 | |
| Pan-American | 87.5 | 12.5 | |
| International | 87.5 | 12.5 | |
| Trans-America | 87.5 | 12.5 | |
| Phibro | 87.5 | 12.5 |
The bookkeeping and the shipping arrangements for all the petitioners were handled in the office of New York in New York City. Orders for chemicals to all the petitioners would be sent to the New York City office, where employees of New York would make arrangements for filling and delivering the orders and would credit the sale to the proper petitioner. During the years here involved and in previous years, the following service charges were paid among petitioners:
| From | To | Amount |
| Massachusetts | New York | $ 15,000 |
| Pennsylvania | New York | 2,400 |
| Maryland | New York | 2,400 |
| Rhode Island | Massachusetts | 24,000 |
| Connecticut | Massachusetts | 24,000 |
The payment from Massachusetts to New York was in respect of services rendered by New York to Rhode Island and Connecticut as well as to Massachusetts. None of the petitioners but New York had bookkeeping or traffic departments. New York, Massachusetts, Connecticut, and Rhode Island had their own *139 salesmen. Massachusetts, Connecticut, Rhode Island, Maryland, and Pennsylvania each maintained offices and employees in their respective States of incorporation; but each gave New York City as its address on the income tax returns filed for the years at issue. Each petitioner maintained a separate bank account and a separate set of books.
The chemicals business with which the petitioners were concerned consisted of the purchasing of industrial and/or agricultural chemicals in large quantities and reselling them at wholesale in smaller quantities. No repackaging, processing, or manufacturing was involved *244 in petitioners' operations. Only some of the petitioners maintained constant inventories. Separate records of such inventories were maintained. The chemicals in inventory were kept either in public warehouses or in two warehouses owned by corporations affiliated with petitioners. If one of the petitioners needed a chemical for sale that it did not have in inventory, it would purchase the chemical either from another of petitioners at cost or on the open market.
Each petitioner served, or was formed to serve, a different selling function. New York bought chemicals in the United *140 States and abroad and sold chemicals in New York State, the Midwest, and the Far West. Massachusetts, Connecticut, Rhode Island, Pennsylvania, and Maryland sold chemicals in their respective States of incorporation. Because of differences in customers, these five petitioners generally differed from each other in the types of chemicals sold. For instance, Maryland and Pennsylvania sold primarily agricultural chemicals and only few industrial chemicals. The sales of these five petitioners, however, were divided by location rather than by type of chemical sold. Maryland and Pennsylvania sold chemicals in comparatively large quantities to comparatively few customers. The three New England corporations, on the other hand, served a comparatively large number of customers who purchased chemicals in comparatively small quantities. Massachusetts was the dominant corporation among the three, and rendered various services on behalf of Connecticut and Rhode Island. The bookkeeping and traffic services rendered by New York to Maryland and Pennsylvania were on a substantially smaller scale than those rendered for the three New England corporations. One reason for the incorporation of Massachusetts, *141 Connecticut, and Rhode Island was that in bidding for State and local contracts domestic corporations were given preference if all other circumstances were equal. Another reason was to avoid the duplication of State taxes that would often occur in the case of a corporation doing business in more than one State. Maryland and Pennsylvania were existing businesses when acquired by New York.
Pan-American was established as a Western Hemisphere trading corporation to buy and sell outside of the United States but in the Western Hemisphere. Trans-America was also established as a Western *245 Hemisphere trading corporation to export chemicals from the United States to points in the Western Hemisphere. International and Phibro were established as foreign trade corporations that could avoid the excess profits tax in force during the Korean war. International was created to export chemicals to Europe, while Phibro was to be used both to buy and to sell in Europe. Export was formed to take advantage of certain export discounts and to sell to exporters FAS in the United States.
The following table sets forth certain items reported in petitioners' Federal income tax returns for taxable years ending *142 in 1960, 1961, and 1962:
| Gross profits | |||
| Corporation | TYE | Gross | (gross receipts |
| receipts | less cost of | ||
| goods sold) | |||
| 6/30/60 | $ 3,921,682.21 | $ 380,642.12 | |
| New York | 6/30/61 | 3,906,893.60 | 366,367.94 |
| 6/30/62 | 4,314,402.32 | 400,937.17 | |
| 6/30/60 | 2,999,138.06 | 173,775.20 | |
| Massachusetts | 6/30/61 | 3,507,722.27 | 159,446.49 |
| 6/30/62 | 2,975,386.39 | 168,874.44 | |
| 2/29/60 | 939,143.57 | 52,081.27 | |
| Pennsylvania | 2/28/61 | 981,228.58 | 50,212.55 |
| 2/28/62 | 1,413,497.57 | 76,350.42 | |
| 2/29/60 | 1,243,545.82 | 38,797.66 | |
| Maryland | 2/28/61 | 1,663,803.51 | 31,392.82 |
| 2/28/62 | 2,840,582.02 | 74,398.45 | |
| 11/30/60 | 1,121,140.87 | 128,010.21 | |
| Connecticut | 11/30/61 | 1,243,177.74 | 116,369.43 |
| 11/30/62 | 1,008,391.45 | 128,645.83 | |
| 11/30/60 | 1,792,310.40 | 136,415.29 | |
| Rhode Island | 11/30/61 | 2,092,462.67 | 136,982.66 |
| 11/30/62 | 2,513,846.77 | 156,389.29 | |
| 11/30/60 | 41,101.26 | 5,288.20 | |
| Export | 11/30/61 | 41,954.59 | 3,436.75 |
| 11/30/62 | 76,147.54 | 4,373.04 | |
| 3/31/60 | 569,735.33 | 28,007.44 | |
| Pan-American | 3/31/61 | 391,448.68 | 24,830.35 |
| 3/31/62 | 423,417.31 | 45,992.55 | |
| 3/31/60 | 142,139.82 | 21,032.07 | |
| International | 3/31/61 | 112,413.36 | 13,485.90 |
| 3/31/62 | 262,815.36 | 32,149.89 | |
| 3/31/60 | 256,286.79 | 14,085.14 | |
| Trans-America | 3/31/61 | 248,253.04 | 14,240.82 |
| 3/31/62 | 136,422.13 | 10,245.73 | |
| 3/31/60 | 97,317.84 | 8,538.59 | |
| Phibro | 3/31/61 | 10,995.14 | 3,598.24 |
| 3/31/62 | 14,797.84 | 4,091.96 |
| Corporation | Other | Total | Taxable |
| income | deductions | income | |
| ($ 223.34) | $ 363,429.78 | $ 16,989.00 | |
| New York | 988.50 | 355,639.24 | 11,717.20 |
| 152.03 | 385,145.50 | 15,943.70 | |
| 280.11 | 147,892.88 | 26,162.45 | |
| Massachusetts | 401.69 | 134,662.03 | 25,186.15 |
| 909.83 | 146,752.87 | 23,031.40 | |
| 321.16 | 26,566.24 | 25,836.19 | |
| Pennsylvania | 1,720.33 | 28,884.79 | 23,048.09 |
| 2,587.13 | 53,504.46 | 25,433.09 | |
| 17,420.68 | 28,924.34 | 27,294.00 | |
| Maryland | 39,559.64 | 46,166.34 | 24,786.12 |
| 24,758.40 | 74,221.87 | 24,934.98 | |
| 2,501.29 | 107,745.32 | 22,766.18 | |
| Connecticut | 4,543.15 | 96,618.25 | 24,294.33 |
| 2,040.68 | 107,463.30 | 23,223.21 | |
| 698.23 | 111,517.08 | 25,596.44 | |
| Rhode Island | 279.91 | 111,261.07 | 26,001.50 |
| 729.99 | 130,930.22 | 26,189.06 | |
| 739.73 | 4,548.47 | ||
| Export | 426.30 | 3,010.45 | |
| 483.38 | 3,889.66 | ||
| 10,239.05 | 17,768.39 | ||
| Pan-American | 8,884.61 | 15,945.74 | |
| 19,218.52 | 26,774.03 | ||
| 2,175.19 | 18,856.88 | ||
| International | 1,384.06 | 12,101.84 | |
| 3,650.50 | 28,499.39 | ||
| 1,230.24 | 5,401.76 | 9,913.62 | |
| Trans-America | 4,980.04 | 9,260.78 | |
| 3,678.22 | 6,567.51 | ||
| 2,427.89 | 1,100.08 | 9,866.40 | |
| Phibro | 654.50 | 426.06 | 3,826.68 |
| 533.82 | 3,558.14 |
The *143 separate components of the figures in the "Total Deductions" column in the foregoing table are shown below: *246
| DEDUCTIONS | ||||
| Officer | Officer | Officer | ||
| Corporation | TYE | salary to | salary to | salary to |
| C. Bendheim | B. Landers | M. Bock | ||
| 6/30/60 | $ 15,000.00 | $ 15,000.00 | ||
| New York | 6/30/61 | 15,000.00 | 16,500.00 | |
| 6/30/62 | 15,000.00 | 18,000.00 | ||
| 6/30/60 | 9,750.00 | $ 20,000.00 | ||
| Massachusetts | 6/30/61 | 9,750.00 | 19,000.00 | 4,450.00 |
| 6/30/62 | 9,750.00 | 21,000.00 | 3,900.00 | |
| 2/29/60 | 7,100.00 | |||
| Pennsylvania | 2/28/61 | 12,100.00 | 6,400.00 | |
| 2/28/62 | 17,099.34 | 13,900.00 | ||
| 2/29/60 | 7,100.00 | |||
| Maryland | 2/28/61 | 7,100.00 | ||
| 2/28/62 | 17,099.34 | 6,066.68 | ||
| 11/30/60 | 25,200.00 | 2,600.00 | ||
| Connecticut | 11/30/61 | 5,200.00 | 10,600.00 | |
| 11/30/62 | 27,698.74 | 10,599.37 | ||
| 11/30/60 | 5,200.00 | 2,600.00 | 11,275.00 | |
| Rhode Island | 11/30/61 | 5,200.00 | 10,600.00 | 3,900.00 |
| 11/30/62 | 5,200.00 | 2,600.00 | 18,900.00 | |
| 11/30/60 | ||||
| Export | 11/30/61 | |||
| 11/30/62 | ||||
| 3/31/60 | ||||
| Pan-American | 3/31/61 | |||
| 3/31/62 | ||||
| 3/31/60 | ||||
| International | 3/31/61 | |||
| 3/31/62 | ||||
| 3/31/60 | ||||
| Trans-America | 3/31/61 | |||
| 3/31/62 | ||||
| 3/31/60 | ||||
| Phibro | 3/31/61 | |||
| 3/31/62 |
| DEDUCTIONS | |||
| Other wages | |||
| Corporation | and salaries | Rent | Taxes |
| 1 $ 154,398.24 | $ 24,898.57 | $ 7,319.67 | |
| New York | 165,143.07 | 25,307.21 | 7,703.99 |
| 162,072.03 | 25,441.20 | 8,393.42 | |
| 1 73,347.23 | 4,451.53 | 5,204.40 | |
| Massachusetts | 67,403.22 | 4,451.68 | 5,299.72 |
| 66,595.87 | 9,030.00 | 4,967.62 | |
| 9,566.00 | 2,900.72 | ||
| Pennsylvania | 1,845.38 | ||
| 13,113.34 | 3,744.42 | ||
| 12,600.00 | 48.00 | 2,024.78 | |
| Maryland | 21,350.00 | 48.00 | 2,203.54 |
| 17,599.34 | 16.00 | 2,550.37 | |
| 31,300.67 | 2,873.94 | ||
| Connecticut | 32,718.62 | 2,990.45 | |
| 22,424.25 | 3,066.98 | ||
| 2 40,590.93 | 698.60 | 3,322.26 | |
| Rhode Island | 2 39,604.43 | 707.96 | 3,296.63 |
| 2 48,129.86 | 1,220.40 | 4,729.70 | |
| 231.23 | |||
| Export | 202.81 | ||
| 228.38 | |||
| 1,377.41 | |||
| Pan-American | 1,190.87 | ||
| 2,173.38 | |||
| 1,088.19 | |||
| International | 642.06 | ||
| 1,699.69 | |||
| 746.37 | |||
| Trans-America | 695.18 | ||
| 564.06 | |||
| 562.08 | |||
| Phibro | 191.06 | ||
| 248.09 |
| DEDUCTIONS | |||
| Charitable | Total | ||
| Corporation | contributions | Other | deductions |
| $ 894.16 | $ 145,919.14 | $ 363,429.78 | |
| New York | 616.69 | 125,368.28 | 355,639.24 |
| 839.14 | 155,399.71 | 385,145.50 | |
| 1,365.00 | 33,774.72 | 147,892.88 | |
| Massachusetts | 1,300.00 | 23,007.41 | 134,662.03 |
| 1,212.18 | 30,297.20 | 146,752.87 | |
| 1,350.00 | 5,649.52 | 26,566.24 | |
| Pennsylvania | 1,200.00 | 7,339.41 | 28,884.79 |
| 1,300.00 | 4,347.36 | 53,504.46 | |
| 1,420.00 | 5,731.56 | 28,924.34 | |
| Maryland | 1,300.00 | 14,164.80 | 46,166.34 |
| 1,200.00 | 29,690.14 | 74,221.87 | |
| 1,150.00 | 44,620.71 | 107,745.32 | |
| Connecticut | 1,278.65 | 43,830.53 | 96,618.25 |
| 1,222.27 | 42,451.69 | 107,463.30 | |
| 1,325.00 | 46,505.29 | 111,517.08 | |
| Rhode Island | 1,300.00 | 46,652.05 | 111,261.07 |
| 1,250.00 | 48,900.26 | 130,930.22 | |
| 225.00 | 283.50 | 739.73 | |
| Export | 150.00 | 73.49 | 426.30 |
| 200.00 | 55.00 | 483.38 | |
| 1,275.00 | 7,586.64 | 10,239.05 | |
| Pan-American | 1,100.00 | 6,593.74 | 8,884.61 |
| 1,928.32 | 15,116.82 | 19,218.52 | |
| 975.00 | 112.00 | 2,175.19 | |
| International | 600.00 | 142.00 | 1,384.06 |
| 1,300.00 | 650.81 | 3,650.50 | |
| 700.00 | 3,955.39 | 5,401.76 | |
| Trans-America | 650.00 | 3,634.86 | 4,980.04 |
| 473.01 | 2,641.15 | 3,678.22 | |
| 500.00 | 38.00 | 1,100.08 | |
| Phibro | 200.00 | 35.00 | 426.06 |
| 187.27 | 98.46 | 533.82 |
*247 The amounts set forth above as "other" deductions represent solely office, legal, *145 and accounting expenses in the case of Export, Pan-American, International, Trans-America, and Phibro, except that they also include special deductions for Western Hemisphere trade corporations in the case of Pan-American and Trans-America.
Petitioners' Federal income tax returns for taxable years ending in 1960, 1961, and 1962 also contained the following balance sheets:
| Year ending June 30 -- | |||
| New York | |||
| 1960 | 1961 | 1962 | |
| Assets | |||
| Cash | $ 45,163.31 | $ 34,939.66 | $ 26,229.45 |
| Receivables (net) | 715,122.12 | 1,510,089.60 | 1,189,910.02 |
| Inventories | 310,516.15 | 353,523.24 | 367,378.79 |
| Other investments | 2,406.87 | 2,406.87 | 2,406.87 |
| Buildings and fixed assets (net) | 1.00 | 1.00 | 1.00 |
| Other | 750.00 | 1,125.00 | 925.00 |
| Total assets | 1,073,959.45 | 1,902,085.37 | 1,586,851.13 |
| Liabilities and capital | |||
| Accounts payable | 619,895.46 | 1,407,573.44 | 1,033,917.87 |
| Other current liabilities | 18,826.30 | 36,077.62 | 43,172.67 |
| Preferred stock | 100,000.00 | 100,000.00 | 100,000.00 |
| Common stock | 202,500.00 | 203,310.00 | 203,310.00 |
| Surplus reserves | 52,000.00 | ||
| Earned surplus and undivided profits | 80,737.69 | 155,124.31 | 206,450.59 |
| Total liabilities and capital | 1,073,959.45 | 1,902,085.37 | 1,586,851.13 |
| Year ending June 30 -- | |||
| Massachusetts | |||
| 1960 | 1961 | 1962 | |
| Assets | |||
| Cash | $ 47,626.34 | $ 23,755.00 | $ 20,975.98 |
| Receivables (net) | 379,438.46 | 802,235.88 | 732,068.57 |
| Inventories | 160,520.72 | 274,494.20 | 274,524.23 |
| Other assets | 500.00 | 950.00 | 2,250.00 |
| Total assets | 588,085.52 | 1,101,435.08 | 1,029,818.78 |
| Liabilities and capital | |||
| Accounts payable | 318,726.56 | 810,189.04 | 728,248.68 |
| Other current liabilities | 14,023.55 | 18,306.40 | 14,581.27 |
| Common stock | 100.00 | 100.00 | 100.00 |
| Surplus reserves | 50,000.00 | ||
| Earned surplus and undivided profits | 205,235.41 | 272,839.64 | 286,888.83 |
| Total liabilities and capital | 588,085.52 | 1,101,435.08 | 1,029,818.78 |
| Year ending -- | |||
| Pennsylvania | |||
| 2/29/60 | 2/28/61 | 2/28/62 | |
| Assets | |||
| Cash | $ 29,749.90 | $ 27,332.75 | $ 34,898.66 |
| Receivables (net) | 182,829.26 | 278,122.09 | 359,098.06 |
| Inventories | 135,970.88 | 119,260.00 | |
| Total assets | 348,550.04 | 424,714.84 | 393,996.72 |
| Liabilities and capital | |||
| Accounts payable | 164,483.35 | 217,655.96 | 171,462.20 |
| Other current liabilities | 9,132.42 | 15,947.35 | 13,671.51 |
| Common stock | 500.00 | 500.00 | 500.00 |
| Surplus reserves | 20,000.00 | 31,000.00 | |
| Earned surplus and undivided profits | 154,434.27 | 159,611.53 | 208,363.01 |
| Total liabilities and capital | 348,550.04 | 424,714.84 | 393,996.72 |
| Year ending -- | |||
| Maryland | |||
| 2/29/60 | 2/28/61 | 2/28/62 | |
| Assets | |||
| Cash | $ 28,666.06 | $ 19,502.75 | $ 22,061.59 |
| Receivables (net) | 341,290.92 | 404,908.82 | 565,680.24 |
| Inventories | 53,908.60 | 46,860.00 | |
| Total assets | 423,865.58 | 471,271.57 | 587,741.83 |
| Liabilities and capital | |||
| Accounts payable | 264,681.68 | 295,932.97 | 389,424.38 |
| Other current liabilities | 10,415.34 | 9,219.76 | 14,744.12 |
| Common stock | 500.00 | 500.00 | 500.00 |
| Surplus reserves | 20,000.000 | 30,000.00 | |
| Earned surplus and undivided profits | 128,268.56 | 135,618.84 | 183,073.33 |
| Total liabilities and capital | 423,865.58 | 471,271.57 | 587,741.83 |
| Year ending Nov. 30 -- | |||
| Connecticut | |||
| 1960 | 1961 | 1962 | |
| Assets | |||
| Cash | $ 22,655.18 | $ 3,438.29 | $ 15,988.27 |
| Receivables (net) | 175,282.24 | 321,953.84 | 388,070.94 |
| Inventories | 37,134.68 | 48,354.51 | 46,264.32 |
| Total assets | 235,072.10 | 373,746.64 | 450,323.53 |
| Liabilities and capital | |||
| Accounts payable | 60,401.81 | 200,621.66 | 243,126.30 |
| Other current liabilities | 24,597.65 | 27,287.08 | 45,357.99 |
| Other liabilities | 6,829.85 | ||
| Common stock | 900.00 | 912.00 | 912.00 |
| Surplus reserves | 18,000.00 | ||
| Earned surplus and undivided profits | 124,342.79 | 144,925.90 | 160,927.24 |
| Total liabilities and capital | 235,072.10 | 373,746.64 | 450,323.53 |
| Year ending Nov. 30 -- | |||
| Rhode Island | |||
| 1960 | 1961 | 1962 | |
| Assets | |||
| Cash | $ 23,176.18 | $ 28,470.42 | $ 17,447.36 |
| Receivables (net) | 344,448.89 | 522,132.19 | 538,240.55 |
| Inventories | 23,135.29 | 16,829.33 | 30,478.94 |
| Total assets | 390,760.36 | 567,431.94 | 586,166.85 |
| Liabilities and capital | |||
| Accounts payable | 205,307.51 | 373,012.43 | 374,795.83 |
| Other current liabilities | 15,386.61 | 29,844.28 | 29,010.67 |
| Other liabilities | 7,810.15 | ||
| Common stock | 900.00 | 880.00 | 880.00 |
| Surplus reserves | 20,000.00 | ||
| Earned surplus and undivided profits | 141,356.09 | 163,695.23 | 181,480.35 |
| Total liabilities and capital | 390,760.36 | 567,431.94 | 586,166.85 |
| Year ending Nov. 30 -- | |||
| Export | |||
| 1960 | 1961 | 1962 | |
| Assets | |||
| Cash | $ 23,309.07 | $ 10,336.69 | $ 10,957.14 |
| Receivables (net) | 71,009.25 | 58,735.33 | 62,828.86 |
| Other investments | 18,648.89 | ||
| Total assets | 94,318.32 | 87,720.91 | 73,786.00 |
| Liabilities and capital | |||
| Accounts payable | 1,015.44 | 1,208.04 | 2,870.93 |
| Other current liabilities | 230.23 | 1,064.95 | 1,393.28 |
| Other liabilities | 1,364.54 | ||
| Common stock | 900.00 | 880.00 | 880.00 |
| Surplus reserves | 14,000.00 | ||
| Earned surplus and undivided profits | 76,808.11 | 84,567.92 | 68,641.79 |
| Total liabilities and capital | 94,318.32 | 87,720.91 | 73,786.00 |
| Year ending Mar. 31 -- | |||
| Pan-American | |||
| 1960 | 1961 | 1962 | |
| Assets | |||
| Cash | $ 82,256.40 | $ 14,797.13 | $ 40,046.08 |
| Receivables (net) | 96,192.20 | 187,320.62 | 168,225.30 |
| Total assets | 178,448.60 | 202,117.75 | 208,271.38 |
| Liabilities and capital | |||
| Accounts payable | 83,484.84 | 98,941.33 | 72,403.37 |
| Other current liabilities | 6,706.93 | 5,973.59 | 10,554.88 |
| Common stock | 900.00 | 960.00 | 960.000 |
| Surplus reserves | 14,000.00 | 14,000.00 | |
| Earned surplus and undivided profits | 73,356.83 | 82,242.83 | 124,353.13 |
| Total liabilities and capital | 178,448.60 | 202,117.75 | 208,271.38 |
| Year ending Mar. 31 -- | |||
| International | |||
| 1960 | 1961 | 1962 | |
| Assets | |||
| Cash | $ 25,693.91 | $ 3,374.80 | $ 20,025.71 |
| Receivables (net) | 61,142.11 | 88,340.80 | 133,814.79 |
| Inventories | 5,303.87 | 3,442.95 | |
| Total assets | 92,139.89 | 95,158.55 | 153,840.50 |
| Liabilities and capital | |||
| Accounts payable | 5,681.75 | 38,510.89 | |
| Other current liabilities | 6,744.25 | 4,271.61 | 10,978.37 |
| Common stock | 900.00 | 960.00 | 960.00 |
| Surplus reserves | 6,000.00 | 9,000.00 | |
| Earned surplus and undivided profits | 78,495.64 | 75,245.19 | 103,391.24 |
| Total liabilities and capital | 92,139.89 | 95,158.55 | 153,840.50 |
| Year ending Mar. 31 -- | |||
| Trans-America | |||
| 1960 | 1961 | 1962 | |
| Assets | |||
| Cash | $ 18,044.98 | $ 6,408.41 | $ 4,165.15 |
| Receivables (net) | 119,567.70 | 165,077.96 | 129,334.31 |
| Total assets | 137,612.68 | 171,486.37 | 133,499.46 |
| Liabilities and capital | |||
| Accounts payable | 80,398.26 | 108,964.03 | 65,000.00 |
| Other current liabilities | 3,719.46 | 3,472.41 | 2,493.31 |
| Common stock | 900.00 | 960.00 | 960.00 |
| Surplus reserves | 13,000.00 | 13,000.00 | |
| Earned surplus and undivided profits | 39,594.96 | 45,089.93 | 65,046.15 |
| Total liabilities and capital | 137,612.68 | 171,486.37 | 133,499.46 |
| Year ending Mar. 31 -- | |||
| Phibro | |||
| 1960 | 1961 | 1962 | |
| Assets | |||
| Cash | $ 57,730.49 | $ 13,696.29 | $ 6,077.07 |
| Receivables (net) | 40,000.00 | 50,000.00 | |
| Total assets | 57,730.49 | 53,696.29 | 56,077.07 |
| Liabilities and capital | |||
| Other current liabilities | 3,521.00 | 1,338.06 | 1,274.53 |
| Common stock | 900.00 | 960.00 | 960.00 |
| Surplus reserves | 12,000.00 | 12,000.00 | |
| Earned surplus and undivided profits | 41,309.49 | 39,398.23 | 53,842.54 |
| Total liabilities and capital | 57,730.49 | 53,696.29 | 56,077.07 |
*148 *250 Each petitioner filed a separate Federal income tax return, and each availed itself in computing its tax liability of the surtax exemption provided in section 11, I.R.C. 1954. In his notice of deficiency to New York, the Commissioner made an adjustment relating to a leasehold expenditure, which has not been contested, and further, under the authority of sections 482 and 61(a) allocated to New York the gross income and deductions of the 10 other petitioners for the 12-month periods ended June 30, 1960, June 30, 1961, and June 30, 1962, with certain adjustments for intercorporate payments. The determination for the year ending June 30, 1961, was asserted under the provisions of section 6501(e). In his notices of deficiency to the petitioners other than New York, the Commissioner determined that, by virtue of section 269, none of these petitioners was entitled to compute its tax liability by using the surtax exemption provided in section 11. He has abandoned this contention with regard to all petitioners but Export.
OPINION
1. The Commissioner relies on sections 61(a) and 482 in his determination that the net income of all the petitioners in the taxable years is taxable to New York. *149 For the reasons set forth in the accompanying footnote, we consider only section 482, 2 which provides as follows:
SEC. 482. ALLOCATION OF INCOME AND DEDUCTIONS AMONG TAXPAYERS
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 Secretary or his delegate may distribute, apportion, or allocate gross income, deductions, credits, or allowances 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.
We discussed certain aspects of section 482 in Pauline W. Ach, 42 T.C. 114">42 T.C. 114, 125-126, affirmed 358 F. 2d 342 (C.A. 6), certiorari denied 385 U.S. 899">385 U.S. 899:
*251 Section 482 is remedial in character. It is couched in broad, comprehensive terms, and we should be slow to give it a narrow, inhospitable reading that fails to achieve the end that the legislature plainly had in view. * * *
* * * *
Respondent may allocate *150 income under section 482 in order to prevent "evasion of taxes or clearly to reflect the income." The legislative history of section 482 indicates that it was designed to prevent evasion of taxes by the arbitrary shifting of profits, the making of fictitious sales, and other such methods used to "milk" a taxable entity, Ballentine Motor Co., Inc., 39 T.C. 348">39 T.C. 348, affirmed 321 F. 2d 796 (C.A. 4); Seminole Flavor Co., 4 T.C. 1215">4 T.C. 1215, 1228. The Commissioner has considerable discretion in applying this section and his determinations must be sustained unless he has abused his discretion. We may reverse his determinations only where the taxpayer proves them to be unreasonable, arbitrary, or capricious. See, e.g., G.U.R. Co. v. Commissioner, 117 F. 2d 187, 189 (C.A. 7); National Securities Corp., 46 B.T.A. 562">46 B.T.A. 562, 564, affirmed 137 F. 2d 600, 602 (C.A. 3), certiorari denied 320 U.S. 794">320 U.S. 794; Grenada Industries, Inc., 17 T.C. 231">17 T.C. 231, 255, affirmed 202 F. 2d 873 (C.A. 5), certiorari denied 346 U.S. 819">346 U.S. 819. * * *
See also Grenada Industries, Inc., 17 T.C. 231">17 T.C. 231, 255. The Commissioner in this case has relied on section 482 "clearly to reflect the income" of petitioners. He does not claim that the reallocation was *151 necessary "to prevent evasion of taxes." That the allocation of net income is proper has now been firmly established. See, e.g., Pauline W. Ach, 42 T.C. at 126; Hamburgers York Road, Inc., 41 T.C. 821">41 T.C. 821, 824; Ballentine Motor Co., 39 T.C. 348">39 T.C. 348, 357, affirmed 321 F. 2d 796 (C.A. 4).
In discussing the application of section 482*152 to this case, it is helpful to divide the petitioners whose reported income was allocated to New York into two groups. The first group, which we will call the foreign sales corporations, consists of Export, Pan-American, International, Trans-America, and Phibro. We hold that the Commissioner's determination with regard to these petitioners must be sustained. Petitioners apparently assume that section 482 cannot be applied to corporations formed for a valid business purpose, a plainly untenable position, for even if a corporate entity may not otherwise be disregarded, the question still remains whether income actually earned by one corporation has been artificially deflected to another under common control, and it is in precisely such circumstances that the Commissioner is authorized to make a reallocation under section 482 in order to reflect income clearly. Grenada Industries, Inc., 17 T.C. at 252-253; Local Finance Corp., 48 T.C. 773">48 T.C. 773, 792. Petitioners have introduced no evidence to show that the foreign sales corporations, rather than New York, actually earned the income reported on their returns. The record in this respect is woefully deficient. On their tax returns for the *153 years involved, none of these corporations reported any deductions for salaries or wages. There is no indication that any of them had any employees. *252 It is undisputed that all bookkeeping and shipping arrangements were made in the office of New York, and that buyers' orders were processed in the same office. The only deductions on the returns of the foreign sales corporations were for contributions, taxes, minimal amounts for office, legal, and accounting expenses, and special deductions in the case of the Western Hemisphere trade corporations.
A corporation can carry on business only through agents, and petitioners have not shown in the case of these corporations that there were any agents actually producing the reported income. Cf. Griffin & Co. v. United States, 389 F. 2d 802 (Ct. Cl.). While these corporations may have been formed for valid business purposes, petitioners have not shown that during the years at issue the corporations themselves in fact carried on any business activities. The record in this case is quite vague concerning the mechanics of the chemical sales involved, and we conclude that petitioners have failed to sustain their burden of proving erroneous the *154 Commissioner's determination that the income reported for the years in question by Export, Pan-American, International, Trans-America, and Phibro was actually earned by New York. In light of our conclusions here it is unnecessary to deal with the Commissioner's alternative contention that Export's surtax exemption for its taxable years ending November 30, 1960, and November 30, 1962, should be disallowed under section 269.
The Commissioner's allocation of the net income of Massachusetts, Pennsylvania, Maryland, Connecticut, and Rhode Island (which we will call the domestic sales corporations) to New York presents different problems. Although we are again hampered by an unsatisfactory record, we think that enough has been shown to establish that the Commissioner's allocation of all the net income is arbitrary and erroneous and that there is no basis for any reallocations.
The tax returns of the domestic sales corporations in evidence (whose figures are not disputed) reveal that, in sharp contrast to the foreign sales corporations, the domestic corporations did themselves carry on substantial activities, which produced the income reported on the returns. Massachusetts maintained an *155 office and employees, including salesmen. Our findings show that with gross profits of $ 173,775.20, $ 159,446.49, and $ 168,874.44, respectively, for the years indicated, Massachusetts paid around $ 100,000 each year in wages and salaries, as well as substantial amounts for rent, salesmen's expenses, telephone, insurance, postage, and other office expenses. It maintained substantial inventories in each year. The only activities related to the earning of Massachusetts' income that appear to have been performed by New York were bookkeeping and traffic functions. We have no reason to conclude that these functions were other than purely routine or that *253 New York played any significant part in generating the business of Massachusetts. Massachusetts paid New York $ 15,000 for such services (as well as for similar services to Connecticut and Rhode Island); such amount appears to have been adequate.
Rhode Island and Connecticut may be treated together. Each maintained offices 3 and employees, including salesmen. Rhode Island, with gross profits of $ 136,415.29, $ 136,982.66, and $ 156,389.29, respectively, for the 3 years indicated in our findings, paid between $ 48,000 and $ 73,000 *156 each year in salaries. Connecticut with gross profits of $ 128,010.21, $ 116,369.43, and $ 128,645.83 for its 3 indicated years, paid between $ 47,000 and $ 60,000 in salaries. Each corporation further deducted substantial amounts for such items as salesmen's expenses, stationery and printing, telephone, insurance, postage, and legal and accounting fees. Each corporation maintained a substantial inventory. The only efforts of New York that appear to have contributed to the earnings of Connecticut and Rhode Island were bookkeeping and traffic functions. Connecticut and Rhode Island each paid Massachusetts $ 24,000 per year for services rendered, and undoubtedly some of these payments were to reimburse Massachusetts for money paid to New York for services rendered by New York to Connecticut and Rhode Island. 4
Pennsylvania and Maryland may also be treated together. It is important to note at the outset that their business differed from the New *157 England companies in that fewer orders but larger volumes were involved. Both Pennsylvania and Maryland maintained small offices and some employees. While it is not clear whether either had its "own" salesmen, each deducted sums for "salesmen's expenses" on the returns before us. Pennsylvania, with gross profits as indicated for the years in our findings of $ 52,081.27, $ 50,212.55, and $ 76,350.42 deducted salaries in those years in amounts from around $ 16,000 to $ 43,000. Maryland, with gross profits of $ 38,797.66, $ 31,392.82, and $ 74,398.45, deducted salaries from around $ 19,700 to $ 40,000. Both corporations maintained substantial inventories for at least some years. While New York clearly performed office functions for the two corporations, they each paid New York $ 2,400 per year for such services. That this amount is lower than that paid by the New England companies is explained by the differences in the nature of the business as set forth above.
In short, the record discloses no basis for concluding that any of the income reported by the domestic sales corporations should be reallocated *254 to New York; to the contrary, it indicates that these corporations earned their *158 own income, New York having been compensated for any services it performed. It does seem coincidental that the taxable income for each of the domestic sales corporations on all of the returns before us was very close to $ 25,000. It does not necessarily follow, however, that these corporations were reporting net income actually earned by New York. For instance, it may be that officers' salaries were manipulated or inflated in some years. Such an issue is, of course, not before us.
2. The remaining issue is whether the Commissioner's determination with respect to New York's taxable year ending June 30, 1961, was barred by limitations. It is undisputed that the usual 3-year period of limitations of section 6501(a) had expired, but the Government relies upon the 6-year period of section 6501(e) which applies when there is an omission of gross income in excess of 25 percent of the amount reported on the return. 5 If the 6-year period is applicable, there is no question that the Commissioner's action was timely. The burden of proof as to the existence of the 25-percent omission is upon the Commissioner. Gaylor C. Peters, 51 T.C. 266">51 T.C. 266, 230; Nadine I. Davenport, 48 T.C. 921">48 T.C. 921, 927-928; *159 C. A. Reis, 1 T.C. 9">1 T.C. 9, affirmed 142 F. 2d 900 (C.A. 6).
The income claimed to have been omitted is the reallocated income from the other petitioners. *160 New York argues that since all the gross income was reported by the petitioners taken as a group, it cannot be said that such income was "omitted." (But see, Pauline W. Ach, 42 T.C. at 127, fn. 2). We need not pass upon this point here because we conclude that the Commissioner has not proved that the 25-percent requirement was met in any event.
In the case of a trade or business, "gross income" as used in section 6501(e)(1) means gross receipts without any reduction for cost of goods sold. Sec. 6501(e)(1)(A)(i). New York's income tax return for the year ending June 30, 1961, reported "gross receipts" of $ 3,906,893.60 *255 and "other income-commissions earned" of $ 988.50, or a total gross income for section 6501(e)(1) purposes of $ 3,907,882.10. Twenty-five percent of this figure is $ 976,970.53. In our conclusions above, we have sustained the Commissioner's allocation to New York of the net income of the foreign sales corporations, but not of that of the domestic sales corporations. The Commissioner, however, has failed to supply us with figures showing the gross income of the foreign sales corporations for the year ending June 30, 1961, and the burden of doing so was upon him. *161 The deficiency notice to New York contains only net income amounts with adjustments for certain intercorporate charges. We may note, however, that the total gross income of the five foreign sales corporations reported on their returns for taxable years ending in 1961 (four on March 31 and one on November 30) is $ 805,719.31, which is around 21 percent of New York's reported gross income for the year ending June 30, 1961.
We hold, therefore, that the deficiency for the year ending June 30, 1961, with respect to New York is barred by limitations.
Decisions will be entered under Rule 50 in docket Nos. 1317-67, 1337-67, 1338-67, 1339-67, 1340-67, and 1359-67.
Decisions will be entered for petitioners in docket Nos. 1314-67, 1315-67, 1316-67, 1360-67, and 1361-67.
Footnotes
1. Cases of the following petitioners are consolidated herewith: Philipp Brothers Chemicals, Inc. (R.I.), docket No. 1315-67; the Philipp Brothers Chemicals Incorporated, docket No. 1316-67; Philipp Brothers Chemicals International Co., Inc., docket No. 1317-67; Philipp Brothers Chemicals Trans-America Corp., docket No. 1337-67; Philipp Brothers Chemicals Pan-American Corp., docket No. 1338-67; Phibro International Corp., docket No. 1339-67; Philipp Brothers Chemicals Export Corp., docket No. 1340-67; Philipp Brothers Chemicals, Inc. (N.Y.), docket No. 1359-67; Philipp Brothers Chemicals, Inc. (Mass.), docket No. 1360-67; Philipp Brothers Chemicals, Inc. (Pa.), docket No. 1361-67.↩
1. B. Landers had been the manager of the New England branch of the old Philipp Bros., Inc.'s chemicals department, and was allowed to purchase his stock in the newly constituted venture under Bendheim's control. He continued to be the manager of the business in the New England area.↩
1. Includes $ 5,042 officer's salary to S. Bendheim.↩
2. Includes officer's salaries to B. V. Sullivan: 1960, $ 23,103.59; 1961, $ 22,860.32; 1962, $ 25,157.96.↩
2. It is clear that sec. 61(a) allows the Commissioner to charge income to whoever actually earns it. See, e.g., Lucas v. Earl, 281 U.S. 111">281 U.S. 111; Griffiths v. Commissioner, 308 U.S. 355">308 U.S. 355; Helvering v. Eubank, 311 U.S. 122">311 U.S. 122; Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591. But as we said in Grenada Industries, Inc., 17 T.C. 231">17 T.C. 231, 253, affirmed 202 F. 2d 873 (C.A. 5), certiorari denied 346 U.S. 819">346 U.S. 819 (speaking of predecessor sections), in the case of organizations under common control, sec. 482 explicitly authorizes the Commissioner to reallocate items in order clearly to reflect the income of each organization and thus to charge the income to the organization that earned it; to the extent that sec. 482 is applicable, therefore, sec. 61(a) adds nothing of strength to the Commissioner's position here. See also Local Finance Corp., 48 T.C. 773">48 T.C. 773, 783-789, affirmed 407 F. 2d 629↩ (C.A. 7, 1969).
3. While Connecticut did not deduct any amounts for rent on the returns before us, it was undisputed that it did maintain an office.↩
4. The question of a possible reallocation between Rhode Island, Connecticut, and Massachusetts is not before us.↩
5. SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.
(a) General Rule. -- Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed * * *
* * * *
(e) Substantial Omission of Items. -- Except as otherwise provided in subsection (c) --
(1) Income Taxes. -- In the case of any tax imposed by subtitle A --
(A) General Rule. -- If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment at any time within 6 years after the return was filed. For purposes of this subparagraph --
(i) In the case of a trade or business, the term "gross income" means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the return) prior to diminution by the cost of such sales or services; * * *↩