*1094 Three corporations, operating adjacent plants, leased a power plant and purchased the equipment therein from one of the corporations, and thereafter, through representatives, one appointed by each, operated the plant (petitioner) exclusively for the purpose of supplying their requirements of water, steam, electricity, and other services at the cost of production. Held, that petitioner is not an association taxable as a corporation.
*1143 This proceeding involves the redetermination of the following deficiencies in income and excess profits taxes and delinquency penalties for the fiscal years ended April 30, 1915 to 1935, inclusive:
| Year | Income tax | Penalty |
| 1915 | $112.03 | |
| 1916 | 279.54 | |
| 1917 | 3,523.48 | |
| 1918 | 22,520.57 | |
| 1919 | 7,941.02 | |
| 1920 | 16,373.12 | |
| 1921 | 31,134.72 | |
| 1922 | 30,877.41 | |
| 1923 | 16,401.44 | |
| 1924 | 16,731.98 | |
| 1925 | 15,087.14 | |
| 1926 | 18,981.80 | |
| 1927 | $14,607.66 | $3,651.92 |
| 1928 | 10,746.63 | 2,686.66 |
| 1929 | 13,209.92 | 3,302.48 |
| 1930 | 13,682.51 | 3,420.63 |
| 1931 | 11,050.86 | 2,762.72 |
| 1932 | 1,844.57 | 461.14 |
| 1933 | 3,320.09 | 830.02 |
| 1934 | 272.60 | 68.15 |
| 1934 | 1 99.13 | 24.78 |
| 1935 | 2,361.27 | 590.32 |
| 1935 | 1 858.65 | 214.66 |
Fraud penalties asserted for the years 1924 to 1935, inclusive, were abandoned by the respondent at the hearing. The issue is whether the petitioner was during the taxable periods an association taxable as a corporation. The stipulation of facts filed by the parties is incorporated herein by reference as a part of our findings of fact. Pertinent facts in the stipulation will be set forth in our findings of fact.
FINDINGS OF FACT.
The Textile Machine Works, hereinafter referred to as Textile, is engaged in the manufacture and sale of knitting and braiding machines and parts thereof and the operation of a general machine shop and foundry. The Berkshire Knitting Mills, hereinafter referred to as Berkshire, is engaged in the manufacture and sale of hosiery. The Narrow Fabric Co., hereinafter referred to as Fabric Co., is engaged in the manufacture and sale of ribbons, binding tape, *1144 and similar products. Textile, Berkshire, and Fabric Co., hereinafter referred to collectively as the three corporations, are Pennsylvania corporation having adjacent plants at Wyomissing, Pennsylvania.
For several years prior to May 1, 1914, Textile*1096 owned and operated a power plant on its property at Wyomissing to furnish water, power, steam, electricity, compressed air, fire protection, and similar services to its manufacturing plants. On November 21, 1913, the three corporations entered into a contract pursuant to the terms of which certain tunnels were constructed from the power plant to the plants of the other two corporations. The cost of the tunnels was to be borne by the three corporations in certain proportions as set forth in the agreement.
On May 1, 1914, Textile, as lessor, leased to the three corporations, as lessee, the land and buildings comprising the power plant of the lessor. The lease was for a period of ten years, with the right of renewal for two additional periods of five years each, at an annual rental of $4,800. The rental was increased to $467.60 per month on February 1, 1915, on account of plant extensions made in accordance with the agreement.
On May 1, 1914, the three corporations entered into an agreement, hereinafter referred to as the agreement of May 1, 1914, for the purpose of operating the power plant and furnishing water, power, steam, electricity, fire protection, and other service*1097 to the plants of the respective corporations. The power plant was operated under the name of Cooperative Power Plant and is the petitioner herein. The agreement also provides, among other things, that:
(1) "* * * whenever hereafter in this agreement the said parties are intended to be referred to collectively, they shall be designated 'cooperative power plant' and whenever they are intended to be referred to as individuals, they shall be designated either by their respective corporate titles or each of the parties."
(2) Each of the parties shall appoint one of its officers or directors "to represent and to be subject to the control of his corporation in the conduct and management of said co-operative power plant and to be subject to removal at will by his principal."
(3) The "co-operative power plant" shall purchase the power plant equipment from Textile for $60,000, payable 50 percent by Textile, 30 percent by Berkshire, and 20 percent by the Fabric Co., and the cost of any additional equipment for the plant shall be borne in proportion to the service rendered to each corporation, pending the ascertainment of which, however, the cost shall be borne in the same ratios as the*1098 cost of the original equipment. Interest at the rate of 6 percent per annum shall be paid on the amount contributed by each corporation to the cost of the equipment for the power plant, *1145 the interest "to be paid out of the operative income of the co-operative power plant."
(4) The "cooperative power plant" shall furnish and maintain all necessary pipes, wire, conduits, and other means of transmission for service to the plants of the respective corporations, the installations to be made in the tunnels constructed under the agreement of November 21, 1913.
(5) All service shall be furnished at cost, which shall include amounts expended for repairs and equipment not otherwise provided for, and overhead charges, and shall be paid for monthly. The initial rates for the various classes of service to be furnished by petitioner shall be at certain specified amounts, provided, however, that the rates may be increased or decreased according to production costs, any amount charged less or more than cost to be paid by, or refunded to, as the case may be, each corporation in proportion to the amount of service received.
(6) All questions of policy and management of petitioner*1099 shall be determined by a majority vote of the representatives of the respective corporations. The agreement shall be in effect for ten years, subject to renewal for two additional terms of five years each.
(7) In the event Textile purchases the equipment of the plant purchased and paid for jointly by the corporations, or other disposition thereof at the expiration of the term of the lease entered into on May 1, 1914, the proceeds of sale shall be divided among the corporations in the proportions that each contributed to the original cost thereof. In case one of the corporations withdraws from the agreement upon expiration of the original ten-year period or any extension thereof, a right granted each corporation subject to written notice given one year prior to the termination of the term, the equipment shall be appraised, but the withdrawing corporation shall have no right to reimbursement for its interest in the original equipment prior to the termination of the agreement. The cost of any new equipment purchased after the withdrawal of any corporation shall be paid for in proportion to the services received during the two preceding calendar years. Upon the final termination*1100 of the agreement and the sale of the equipment of the plant, the proceeds shall be divided among the respective corporations in the proportions to which each contributed to the original cost thereof.
Pursuant to the terms of the agreement of May 1, 1914, each corporation designated its secretary to represent it in the management of the power plant. These individuals and the successor of one of them have at all times acted as the representatives of the corporations in the management of the power plant. They decided all questions of policy in the operation of the power plant, and approved the charge made for service furnished to the three corporations,
*1146 The power plant has at all times since May 1, 1914, been under the direct supervision of J. P. Freund, plant engineer, whose offices are located in the main office building of Textile. He consulted the representatives of the three corporations concerning matters involving expenditures of large sums of money in connection with the operation of the plant. Freund also performed engineering duties for the three corporations. His salary was paid by Textile, which was reimbursed each week by petitioner, Berkshire, and*1101 the Fabric Co. on the basis of the time he devoted to the performance of work for them. The number of employees of petitioner, working exclusively for it, ranged from nine or ten during the summer to thirty in the winter. Their wages were paid by petitioner.
The three corporations kept their books and filed their returns on the accrual basis of accounting. Textile and Berkshire filed their returns on the basis of a fiscal year ended April 30 and the Fabric Co. on the calendar year basis. The books and records of petitioner were kept on the accrual basis and on the basis of a fiscal year ending April 30. They were physically located in the main office building of Textile and were under the supervision of an employee of that corporation. The books and records were at all times kept separate from the books and records of the three corporations. There has at all times material been maintained a bank account under the designation "The Cooperative Power Plant."
Until about October 1916 the petitioner generated all of the electric power furnished in the manufacturing plants of the three corporations. Commencing about October 1, 1916, electric power was partially or wholly acquired*1102 from the Metropolitan Edison Co. and converted by petitioner for the use of the plants of the corporations. All of the orders for the purchase of electric power were executed by Textile. Purchases of other incidental and current supplies were made upon order of Freund on order blanks having a heading containing the following:
THE CO-OPERATIVE POWER PLANT
Operated by
TEXTILE MACHINE WORKS
BERKSHIRE KNITTING MILLS
THE NARROW FABRIC CO.
The letterheads of petitioner bore a like designation.
Monthly statements were prepared by Freund showing the cost of the survice furnished by petitioner and the amount thereof chargeable to each corporation. The amounts charged were entered on the books of the respective corporations as manufacturing expenses and were deducted by them in computing taxable income. The petitioner did not furnish service to anyone other than the three corporations.
*1147 In June 1917 the representatives of the three corporations agreed that the charges made for service during the fiscal years ended in 1916 and 1917 in excess of cost be allowed to accumulate on the books of petitioner to the credit of the respective participating corporations, *1103 instead of being refunded as provided for in the agreement of May 1, 1914. Late in 1917 they adopted a resolution to open on the books of petitioner an account designated "Reserve for Extensions, Improvements and Replacements" and transfer thereto these excess charges, and interest thereon, in order to provide funds for necessary extensions and for the replacement or expansion of existing equipment. Pursuant thereto the rates for service were increased to produce a certain amount each year for the reserve fund. The excess charges were accumulated during the fiscal years ended April 30, 1917 to 1926, inclusive, and credited to the reserve account.
The excess charges, other income, refunds made and transfers to the reserve account each year were as follows:
| Year | Excess charges | Other income | Refunds | Transferred to reserve |
| 1915 | $9,286.76 | $193.79 | $9,480.55 | 0 |
| 1916 | 12,996.48 | 547.63 | 6,668.19 | $6,875.92 |
| 1917 | 27,350.64 | 704.78 | 0 | 28,055.42 |
| 1918 | 49,623.26 | 1 (7,913.16) | 0 | 41,710.10 |
| 1919 | 23,262.30 | 2,632.60 | 0 | 25,894.90 |
| 1920 | 47,920.94 | 5,183.95 | 0 | 53,104.89 |
| 1921 | 81,476.54 | 7,900.72 | 35.84 | 89,341.42 |
| 1922 | 100,822.75 | 9,732.70 | 68.25 | 110,487.20 |
| 1923 | 103,922.26 | 14,806.25 | 103.78 | 118,624.73 |
| 1924 | 107,585.63 | 14,028.68 | 0 | 121,614.31 |
| 1925 | 85,389.56 | 22,398.95 | 805.73 | 106,982.78 |
| 1926 | 110,463.30 | 23,856.11 | 0 | 134,319.41 |
| 1927 | 64,162.81 | 32,981.41 | 97,144.22 | 0 |
| 1928 | 43,424.29 | 27,462.43 | 70,886.72 | 0 |
| 1929 | 80,806.24 | 34,611.46 | 115,417.70 | 0 |
| 1930 | 84,189.69 | 28,120.02 | 112,309.71 | 0 |
| 1931 | 39,611.16 | 681.75 | 40,292.91 | 0 |
| 1932 | 2 (9,608.74) | 17,026.56 | 7,417.82 | 0 |
| 1933 | 2 (1,557.14) | 24,218.01 | 22,660.87 | 0 |
| 1934 | 2 (25,993.00) | 23,057.70 | 3 (2,935.30) | 0 |
| 1935 | 2 (7,988.36) | 21,129.17 | 13,140.81 | 0 |
| Total | 1,027,147.37 | 303,361.51 | 493,497.80 | 837,011.08 |
Out of the amount of $837,011.08 in the reserve account at the close of 1926, a total of $50,000 was refunded to the three corporations in 1933, $9,596.25 in 1934, and $20,000 in 1935, leaving a balance of $757,414.83 in the account at the close of 1935. The amounts listed as "other income" were derived primarily from purchase discounts and interest on bank accounts, loans, and bonds.
The investments of petitioner in loans and securities at the end of its fiscal year in 1915 were $5,000; in 1920, $19,007.16; in 1925, $421,709.30; in 1930, $595,974.90; and in 1935, $578,010.99. Some of *1148 the loans were made to the three corporations, the amount thereof ranging from $5,000 in 1915 to $212,928 in 1924. No such loans were outstanding at the close of some of the taxable years. The petitioner always had a cash balance at the end of its fiscal year. The amount ranged from a low of $973.96 in 1915 to a high of $132,085.15 in 1930.
The charges made by petitioner against the three corporations during the taxable years for service were $5,008,128.11 and the cost of production*1105 thereof was $3,980,980.74. The charges ranged from a low of $44,423.42 in 1915 to a high of $405,635.06 in 1930.
In 1924 and also in 1932 plans were drawn for a new power plant to cost about $1,500,000. The plans were subsequently abandoned.
OPINION.
DISNEY: While the question whether an enterprise is an association taxable as a corporation must in the final analysis rest upon the peculiar facts involved, ; , certain characteristics of an association are set forth in decisions of the Supreme Court. There is no absolute rule by which the question can be determined. In , (a) centralized management, (b) continuity throughout the period of the trust without interruption by death of a participating member, (c) provision for transferring beneficial interests, and (d) limitation of personal liability of the participants to their capital investment were found to be sufficient to classify the trust involved as an association. The Court said that the object of a business trust is "to provide a*1106 medium for the conduct of a business and sharing its gains" and that the term association implies resemblance of corporate form, not identity. The powers conferred by the instrument creating the enterprise determine its character, , and the purpose of the venture is "probably the most important single fact." ; . It has been said that the real test is whether the enterprise "more nearly resembles in general form and mode of procedure a corporation than a partnership." . The resemblance to one form or another should be balanced to test the character of the venture. . The petitioner contends that the enterprise in controversy resembles a partnership or joint venture and in no respect resembles a corporation.
Respondent argues that petitioner was a "live business organization", in "reality a power company in the form of an association." Petitioner, without extended discussion of the point, contends that the*1107 business purpose test is applicable only in distinguishing pure trusts *1149 from business trusts. An enterprise may be engaged in business, yet lack the features necessary to make it analogous to a corporation. . The three corporations entered into a joint arrangement for supplying such steam, electricity, etc., as each required in connection with the operation of its manufacturing business. No provision was made for supplying the service to others at cost or any other price, and none was furnished. Such business as petitioner performed was carried on as a department of the three corporations which had formed it. It had no business distinct from the corporations for whose sole account it was operated. Obviously it was not a power company engaged in furnishing service to the public.
The purpose of the venture was to supply the service to the three corporations at cost, no profit being contemplated. The service furnished the three corporations was measured and, except from 1916 to 1926, inclusive, was first charged to the recipients at rates estimated to recover the cost of production, and then adjustments*1108 were made on the basis of cost by making refunds for overcharges or collecting additional amounts for undercharges. During the years 1916 to 1926, inclusive, the three corporations purposely made overcharges for service to build up a reserve fund out of which to construct a new power plant. Refunds were made, not upon the basis of the capital investment of the respective corporations, but proportionate to the service received. By this arrangement no participating corporation could benefit by refunds at the expense of any other participant. Such gain as the three corporations derived from the venture was only through savings in the cost of their requirements of electricity, steam, etc. They realized no gain from dealings with other corporations or individuals. Thus gain, as the term is generally understood, was not an object of the cooperative arrangement.
The petitioner had earnings from investments made of funds in the reserve account maintained for charges paid by the three corporations for service in excess of cost of production. The assessments made in excess of cost did not constitute gain for more than bookkeeping purposes. The amounts represented indebtedness, and*1109 therefore a liability. ; . The fact that the three corporations deducted the excess charges as ordinary and necessary business expenses, thereby decreasing their income tax liability, is not material in this proceeding.
In , the Court said that "A corporation, as an entity, holds the title to the property embarked in the corporate undertaking." See . The power plant was owned by Textile and at all times material was under lease to the three corporations, *1150 who also held title to the equipment in the plant. The proceeds of a sale or other disposition of the equipment were payable to the three corporations, not petitioner.
The agreement of May 1, 1914, made no provision for the issuance of certificates of beneficial interest or any other evidence of interest in petitioner. Neither did the agreement provide for assignment. The agreement was binding on the participating corporations for a period*1110 of ten years and for two additional terms of five years each, unless by written notice, given at least one year prior to the expiration of the current term, a participant elected to withdraw. Withdrawal by any corporation did not entitle it to receive any amount for its interest in the equipment of the power plant prior to the termination of the agreement, except at the option of the remaining corporations. Provisions of that sort generally appear in articles of copartnership and have no place in corporate organizations.
There was no centralized management here analogous to a corporation. Directors of corporations are elected by stockholders and are subject to removal by them, acting collectively. Here each corporation appointed one of its officers to represent it in the management of the power plant. A majority vote of the three representatives so selected determined all questions involved in the operation of the plant. Each representative was subject to the control of, and subject to removal at will by, his corporation. The representation was several, not joint. Each representative was nothing more than the agent of his principal, not the agent of the group of corporations. *1111 See .
Provision was made in the agreement of May 1, 1914, for the continuity of the undertaking for a definite period of years, but bankruptcy or other termination of the existence of the three corporations in the meantime would have necessarily brought an end to the arrangement made for the operation of the power plant. We find nothing in the agreement under which the three corporations limited their liability. They undertook to pay the cost of the service and their agents had broad powers of management which included authority to contract for the necessary equipment and material to produce the service. As between the corporations there can be no doubt about the liability of the corporations for debts incurred in the venture according to the amount of service received. The three corporations, as principals, were liable for any obligations created by their agents, irrespective of their capital investment in the venture. Upon review of all of the evidence, we hold that the petitioner was not an association taxable as a corporation. Accordingly,
Decision will be entered for the petitioner.