1946 U.S. Tax Ct. LEXIS 91">*91 In Docket No. 7698 decision will be entered under Rule 50. In Docket Nos. 7697, 7699, and 7741 decisions will be entered that petitioners are not liable as transferees.
1. Upon the evidence, held, petitioner Worth Steamship Corporation merely managed and operated a certain steamship for the account of three individual joint venturers and was not, therefore, taxable on the net income realized from such operation except for the monthly fee it received as such manager and operator.
2. Upon the evidence, held, petitioners Sherover, Freeman, and Gillmor are not liable as transferees for any remaining deficiency in taxes plus interest due from petitioner Worth Steamship Corporation on account of some minor adjustments to the net income of the latter which were not contested.
7 T.C. 654">*654 These consolidated proceedings involve deficiencies of the Worth Steamship Corporation for the fiscal year ended February 28, 1942, as follows:
| Income tax | $ 19,784.46 |
| Declared value excess profits tax | 12,840.72 |
| Excess profits tax | 28,134.02 |
7 T.C. 654">*655 and the liability of the three individual petitioners as transferees of the Worth Steamship Corporation, as follows:
| Sherover | Freeman | Gillmor | |
| Income tax | $ 19,784.46 | $ 19,784.46 | $ 19,784.46 |
| Declared value excess profits tax | 12,840.72 | 6,965.54 | 12,840.72 |
| Excess profits tax | 28,134.02 | 28,134.02 | |
| Total | 60,759.20 | 26,750.00 | 60,759.20 |
The three individuals do not concede their liability as transferees.
The deficiencies determined against the Worth Steamship Corporation are due primarily to an adjustment to net income which, in the statement attached to the deficiency notice, was captioned "(a) Income from operation of steamship 'Leslie' $ 104,381.44" and which was explained by the respondent as follows:
(a) It is held that the net income realized from the operation1946 U.S. Tax Ct. LEXIS 91">*93 of the steamship "Leslie", for the period beginning March 14, 1941 and ending February 28, 1942, is taxable to the Worth Steamship Corporation.
By appropriate assignments of error all of petitioners contest this adjustment and contend that the Worth Steamship Corporation is not taxable on the income from the operations of the S. S. Leslie, since at no time was it the equitable or beneficial owner of the property that gave rise to the income, but acted merely as agent for a joint venture composed of the three individual petitioners; and they contend that in any event the income from the operations of the Leslie was grossly overstated by the respondent in that the said income did not exceed the sum of $ 64,379.15. In his brief the respondent "admits that the net income of the steamship 'Leslie' for the period in question was $ 64,379.15."
The deficiencies determined against the Worth Steamship Corporation are also due in part to three minor adjustments to net income (totaling $ 720) which are not contested.
In the transferee proceedings of Sherover and Gillmor, the respondent alleges affirmatively that each petitioner is liable at law and in equity for the taxes and interest1946 U.S. Tax Ct. LEXIS 91">*94 due from the Worth Steamship Corporation for the year in question as transferee under section 311 of the Internal Revenue Code.
In the transferee proceeding of Freeman, the respondent alleges affirmatively that Freeman is liable at law and in equity to the extent of $ 26,750 for the taxes and interest due from the Worth Steamship Corporation for the year in question as transferee under section 311 of the Internal Revenue Code.
7 T.C. 654">*656 FINDINGS OF FACT.
Petitioner Worth Steamship Corporation, hereinafter sometimes referred to as Worth, is a corporation organized under the laws of the State of New York, with its principal office and place of business in New York, New York. Its returns for the period here involved were filed with the collector for the second district of New York.
Petitioner "Miles M. Sherover, Transferee" is a citizen of the United States and resides at present in Mexico City, D. F.
Petitioner "Lewis A. Freeman, Jr. (formerly Louis A. Friedman, Jr.), Transferee" is a resident and citizen of the United States and is at present in the armed forces of the United States.
Petitioner "Daniel S. Gillmor, Transferee" is a citizen of the United States, heretofore residing 1946 U.S. Tax Ct. LEXIS 91">*95 at Washington, D. C., and is now serving in the armed forces of the United States.
Towards the end of the year 1940 Sherover formed a plan to secure, if possible, a passenger vessel to bring Spanish Republicans to Mexico from Africa. Shortly thereafter, Sherover became acquainted with Gillmor and, after some discussions, Gillmor agreed to participate with Sherover in the plan.
Sherover then began negotiations with one Zuber, a Yugoslav citizen residing in the United States, for the purchase of a passenger vessel called the S. S. Lovcen. Zuber, who, through a Panamanian corporation known as Compania Centro Americana de Navegacion Limitada, also owned a freighter called the S. S. Josephine, was unwilling to sell the Lovcen, but indicated his willingness instead to sell a one-half interest in both vessels.
On January 24, 1941, Sherover, under two separate agreements, contracted to purchase from the above mentioned Panamanian corporation a one-half interest in the Lovcen for $ 150,000 and a one-half interest in the Josephine for $ 70,500. Under these two contracts the parties thereto agreed to form a new Panamanian corporation for each of the vessels and to transfer1946 U.S. Tax Ct. LEXIS 91">*96 to such new corporations all of their interests in the Lovcen and the Josephine in exchange for all of the capital stock of the new corporations, respectively.
On February 3, 1941, an agreement was entered into between Sherover and Gillmor which recited that Sherover had entered into an agreement to purchase a one-half interest in the S. S. Josephine for $ 70,500 and an agreement to purchase a one-half interest in the S. S. Lovcen for $ 150,000; that "Sherover desires that Gillmor join with him equally in the purchase of the one-half interest in said ships and that thereafter they continue the exploitation of their direct or indirect interest in said ships as a joint venture"; and that Gillmor desired to join in said venture. Sherover agreed to deliver to Gillmor one-half of the corporate stock of the new corporation to which 7 T.C. 654">*657 Sherover would be entitled under the January 24, 1941, agreements. Each agreed to pay one-half of the purchase price mentioned above, which would amount to $ 110,250 for each, and also agreed to put up one-half of the working capital required in the form of advances to the new Panamanian corporations about to be organized. Paragraph1946 U.S. Tax Ct. LEXIS 91">*97 14 of this agreement provided:
It is the essence of this venture that each party shall have an equal cash and other investment therein and shall share equally in all expenses and obligations and profits of any kind derived therefrom, directly or indirectly, by way of dividends, salary, commission, or otherwise.
All transactions with Zuber were between Zuber and Sherover. Gillmor paid his share to Sherover, who would deposit the money and turn over his own personal check to Zuber. Gillmor never met Zuber.
Repair work was started on the Lovcen to put her in shape for transatlantic voyages and shortly thereafter the British Ministry of Shipping put the Lovcen and Zuber and the Josephine on the black list. Sherover went to see the British Ministry of Shipping in New York. There it was explained to Sherover that the black list was against Zuber and not against Sherover, and that if the latter separated himself from Zuber he would be completely free of any black list of the British Government.
Sherover immediately started negotiations with Zuber looking towards a separation, which were consummated in an agreement between Sherover and the Panamanian corporation (referred 1946 U.S. Tax Ct. LEXIS 91">*98 to in this agreement as "Compania") dated March 4, 1941. In this agreement it was recited that Compania had received from Sherover $ 180,061.29, and it was agreed that Compania should deliver to Sherover all the documents for the "whole interest" in the Josephine instead of a one-half interest; that Sherover should deliver to Compania all the documents for a one-half interest in the Lovcen; that Compania should retain all the moneys heretofore paid to it; and that Sherover should pay Compania an additional sum of $ 30,115.50.
Thereafter the Josephine was put under American registry, its name was changed to the "Leslie," and a bill of sale was executed transferring the title of the whole ship to Sherover.
Sherover kept Gillmor advised of what had happened. There were several discussions with Zuber regarding the possibility of Sherover getting all of the money back from Zuber, but he would not listen to that, so the result was that Gillmor and Sherover had the Leslie on their hands.
Sherover discussed with Gillmor the possibility of bringing Freeman in on the deal, since he had a lot of practical knowledge regarding ships. They decided to give Freeman the right1946 U.S. Tax Ct. LEXIS 91">*99 to purchase a one-eighth interest in the ship, by paying $ 2,500 down and the balance of $ 22,500 out of the profits of the ship. This understanding was verbal. 7 T.C. 654">*658 They also discussed the possibility of getting some well known steamship operating company to operate the vessel. In the early part of March 1941 Sherover had a conversation with H. B. Smith of the firm of Smith and Johnson. This firm wanted 5 per cent of the vessel's gross revenue as compensation for the management and operation of the vessel, and also a 2 1/2 per cent brokerage commission on charter. Sherover also contacted four other firms.
Sherover told Gillmor he thought the proposed charges from outsiders were too high and that he thought that he and Freeman could do the job for $ 1,800 a month. It was then agreed by Sherover, Gillmor, and Freeman that Sherover and Freeman should assume the management and operation of the Leslie as agents for the joint venturers, Sherover, Gillmor, and Freeman.
On March 14, 1941, Sherover and Freeman organized the Worth Steamship Corporation for the purpose of operating the Leslie and possibly for the operation of other vessels.
The capital stock of Worth consisted1946 U.S. Tax Ct. LEXIS 91">*100 of 100 shares, all of which was subscribed and paid for by Sherover and Freeman at $ 1 per share, 50 shares being issued to Sherover and 50 shares to Freeman, who remained the sole stockholders of Worth from the inception of Worth to the present date.
At the first meeting of Worth, Sherover was elected president and Freeman was elected secretary and treasurer. Sherover, Freeman, and Alice A. Sherover (the wife of Sherover) were elected directors. Gillmor was never an officer or director of Worth and he owned no stock in the corporation.
Worth managed and operated the Leslie for the account of Sherover, Gillmor, and Freeman, joint venturers from March 14, 1941, to February 1, 1942, for which Worth received a management fee of $ 1,800 per month. From March 11 to April 10, 1941, title to the Leslie was in the name of Sherover. During such period a charter party agreement was made in Sherover's individual name. Prompted by the desire to build up a good business standing for Worth as an operating company of the Leslie and possibly other vessels, Freeman suggested to Sherover that all charter party agreements be made in the name of Worth. In connection with such plan, 1946 U.S. Tax Ct. LEXIS 91">*101 Freeman further advised Sherover that record title to the Leslie be transferred to Worth. Acting on such advice, Sherover executed a bill of sale for the Leslie to Worth on April 10, 1941. Sherover received nothing from Worth in connection with the execution and delivery of this bill of sale.
Gillmor had no knowledge of the transfer of the ship by Sherover to Worth until towards the end of the summer of 1941. Neither did Gilmor's attorney, Abraham J. Isserman, have knowledge of the transfer to Worth until August 19, 1941, up to which time both Gillmore and 7 T.C. 654">*659 his attorney's information was that title to the Leslie was still in the name of Sherover.
On May 12, 1941, Freeman, as secretary of Worth, executed an ownership oath, which was filed with the United States Maritime Commission and in which it was stated that the Leslie "is wholly the property of * * * Worth Steamship Corporation."
Shortly after the execution of the bill of sale to Worth, Sherover left for a business trip to several South American countries, prior to which time he left instructions that during his absence written agreements should be prepared embodying the previous oral understandings 1946 U.S. Tax Ct. LEXIS 91">*102 among himself, Gillmor, and Freeman.
Due to the absence from the city of first one and then another of the principals and the inability of the attorneys to meet with them, the drawing of the written agreements and the execution thereof were delayed until the first week of September 1941, at which time three agreements were executed. The first agreement was among Sherover, Gillmor, and Freeman, dated back to March 15, 1941, and entitled "Joint Venture Agreement." The second agreement was among Worth, Gillmor, and Sherover, dated back to March 15, 1941, and entitled "Operating Agreement." The third agreement was a declaration of trust by Worth, dated back to April 10, 1941.
The first above mentioned agreement, among other things, recited that "the individual parties desire that the record title to said steamship shall be held in a corporate name for convenience of operation only, and said Sherover has caused to be organized" a corporation known as Worth. Under this agreement the said three parties mutually agreed as follows:
1. Sherover shall immediately convey title to said steamship "Leslie" to Worth Steamship Corporation, in return for which Worth Steamship Corporation will 1946 U.S. Tax Ct. LEXIS 91">*103 execute declaration of trust that it holds said title for convenience only and for the benefit of Miles M. Sherover and Daniel S. Gillmor, equally, subject to the right of Louis A. Friedman, Jr., to acquire from each of said above named individuals 12 1/2% of their interest in said vessel upon his performance of the provisions of paragraph "2" of this agreement. Said declarations of trust will contain a provision that said Worth Steamship Corporation will, upon the demand of either Sherover or Gillmor transfer title to said steamship to the individual parties, as their rights may then appear. * * *
2. Gillmor and Sherover hereby agree to sell to Friedman an undivided 12 1/2% interest in the SS. "Leslie" and in said joint venture for the sum of $ 25,000. Upon the following terms and conditions:
* * * *
5. It is the essence of this venture and of this agreement that Gillmor and Sherover shall have equal cash and other investments therein, and that Friedman, upon taking title, shall have a proportionate cash and other investment therein of 12 1/2%, and that all parties shall share proportionately in all expenses, obligations and profits of any kind derived therefrom, directly or indirectly, 1946 U.S. Tax Ct. LEXIS 91">*104 by way of dividends, salary, commission, sale of the "Leslie" or any interest therein, or otherwise, except as may be provided by the written consent of the parties.
7 T.C. 654">*660 Gillmor hereby agrees that Sherover and Friedman may share without his participation in any profit which they may derive from the agreed sums to be deducted by the Worth Steamship Corporation for its services in operating the "Leslie" under agreement of even date.
* * * *
8. The provisions of this agreement insofar as may be possible, shall be retroactive to February 3, 1941.
9. This agreement shall continue until the venture entered into between the parties is entirely liquidated either by the sale or other disposition of the "Leslie" or by the sale of the parties' interests therein by mutual consent, or as the parties may otherwise agree. The purpose of this venture is to operate the "Leslie" at a profit until such time as an advantageous sale of the "Leslie" can be made.
The second above mentioned agreement was entered into by Worth (called the "company" in the agreement), Gillmor, and Sherover. This agreement recited that Gillmor and Sherover "are each owners of an undivided one-half interest in and to1946 U.S. Tax Ct. LEXIS 91">*105 the" Leslie, and that "the parties desire to provide for the full and complete operation" of the Leslie by Worth. It was, therefore, mutually agreed that "the company shall solely have and retain, during the lifetime of this agreement, full and complete possession" of the Leslie; that the company shall operate the Leslie for the owners; that in case the company was unable to obtain insurance, it would not operate the vessel without the written consent of the owners; that the company "will render to the owners" monthly full and detailed report of its operations; that the company may deduct from the gross receipts, among other items, "A sum not exceeding $ 1,800 per month in full payment for all services rendered by the company or on its behalf, in the management, operation and supervision of the vessel and its business"; and that after six months either Gillmor or Sherover could terminate the agreement upon fifteen days written notice in which event the possession of the vessel "shall vest jointly in Gillmor and Sherover * * *."
The third above mentioned agreement, the "Declaration of Trust," provided, among other things, as follows:
Now Therefore, in consideration1946 U.S. Tax Ct. LEXIS 91">*106 of the premises and other good and valuable considerations the Worth Steamship Corporation (hereinafter called the Corporation), through its duly authorized corporate officers, hereby makes the following declaration of trust:
1. The Corporation is the holder of the record title of the Steamship "Leslie."
2. Said title was conveyed to it by Miles M. Sherover merely for the convenience of Daniel S. Gillmor and Miles M. Sherover, pursuant to the terms of the joint venture agreement hereinabove set forth.
3. The Corporation never had nor has it at present any beneficial interest, direct or indirect, in the Steamship "Leslie" arising out of its record ownership of the title. All of the purchase money for the Steamship "Leslie" was paid by Miles M. Sherover and Daniel S. Gillmor.
4. The only beneficial interest of the Corporation in the Steamship "Leslie" arises out of and is limited to its interest in and to an agreement to operate said vessel dated March 15, 1941 and made between it and Daniel S. Gillmor and Miles M. Sherover.
7 T.C. 654">*661 5. The Corporation holds the record title to the Steamship "Leslie" solely as trustee for the benefit of Miles M. Sherover and Daniel S. Gillmor equally, 1946 U.S. Tax Ct. LEXIS 91">*107 subject to the right of Louis A. Friedman, Jr. to acquire from each of the above named individuals 12 1/2% of their interest in said vessel upon his performance of the provisions of paragraph "2" of the joint venture agreement hereinbefore mentioned.
6. The said Corporation will forthwith transfer to the party making such demand, or to a corporation designated by such party, his undivided interest in and to the Steamship "Leslie," as his rights may then appear. * * *
Monthly reports were submitted by Worth to the beneficial owners, the joint venturers, showing all receipts and disbursements for the account of the beneficial owners, and, after deducting its management fee of $ 1,800 per month, such statements showed the cash balance due to the beneficial owners.
From time to time Worth remitted to the joint venturers sums of money representing the excess of the receipts over disbursements from the operation of the Leslie.
On its books Worth recorded all the receipts from the operations of the Leslie as a credit or liability to the "owners" and all disbursements and its monthly fees as charges to the account of the "owners" and the net balance as a liability to such "owners." 1946 U.S. Tax Ct. LEXIS 91">*108 The books of Worth do not record the Leslie as an asset nor the receipts and disbursements in connection with the operation of such ship as its income and expenses.
On September 24, 1941, Worth received a letter from the United States Maritime Commission which made reference to the Commission's "Information Circular" executed on behalf of Worth in response to the Commission's request of September 9, 1941, and stated that an examination of the circular disclosed that certain questions asked in the circular had not been answered. On October 4, 1941, Worth replied to this letter and, among other things, stated:
This company operates only one vessel, the S. S. Leslie, of which it is the owner of record. However, the company is actually a trustee for the vessel and holds title on behalf of two individuals, both American citizens, Miles M. Sherover, 165 Broadway, New York, N. Y. and Daniel S. Gillmor, 114 East 32d Street, New York, N. Y. Each of the above named individuals is the equitable owner of 50% interest in the vessel, subject to certain rights granted to L. A. Friedman, Jr., 320 East 42nd Street, New York, N. Y., an American citizen, to purchase from them 12 1/2% of their1946 U.S. Tax Ct. LEXIS 91">*109 respective interests. The company operates the vessel under an agency contract whereby it receives a fixed monthly management fee.
Sherover, Gillmor, and Freeman, operating as a joint venture, kept a set of books, which books recorded the ownership of the Leslie, the income and expenses from the operations of such vessel, and an account with Worth as agent, showing Worth's indebtedness to the joint venture for the receipts collected by Worth for the accounts of the beneficial owners and the expenses paid or chargeable to the beneficial owners.
7 T.C. 654">*662 On December 22, 1941, Gillmor made a demand on Worth for the transfer to him of his interest in the Leslie, pursuant to the terms of the declaration of trust dated April 10, 1941. On January 15, 1942, Worth executed a bill of sale transferring to Gillmor his share in the Leslie. This bill of sale was sent for recording with the collector of customs on January 17, 1942, but was returned for some further documentation. In the meantime certain arrangements were being consummated for a bare-boat charter with the Grace Line, Inc., which charter party was made and concluded on February 10, 1942. An admiralty lawyer then 1946 U.S. Tax Ct. LEXIS 91">*110 advised that the bare-boat charter be signed by Worth, since the recording of the bill of sale of January 15, 1942, would have left Worth without full record title, for which reason the bill of sale of January 15, 1942, was not then recorded.
On January 16, 1942, Gillmor served notice on Worth, Sherover, and Freeman that he was terminating, as of February 2, 1942, the operating agreement, dated March 15, 1941, made between Worth, Sherover, and Gillmor covering the operation of the Leslie. On January 30, 1942 Worth wrote Gillmor as follows:
We refer to your registered letter of January 16, 1942, in which you have given us notice of the termination of our agency agreement in connection with the operation of the S. S. Leslie, such termination to occur on February 2d next.
We shall of course make no commitments in your behalf or in behalf of other owners of the S. S. Leslie beyond February 2nd. What monies belonging to the owners we may have in our possession on February 2nd we shall retain until we have determined that there are no longer any outstanding obligations for which this company may have assumed responsibility while acting as your agent.
In view of the fact that the operation1946 U.S. Tax Ct. LEXIS 91">*111 of a steamer, as you may perhaps know, even while in a shipyard, requires attention from day to day, we suggest that the owners of the vessel or their accredited representatives be present at our office on Monday, February 2, 1942, to take off our hands whatever current duties may be involved in the continued care of the vessel.
On April 3, 1942, a new bill of sale was executed by Worth, transferring to Sherover and Gillmor a one-half interest to each in the Leslie. The documentations for this bill of sale were being prepared for proper recording, when in the meantime, on April 12, 1942, the Leslie was sunk by a German submarine.
On April 4, 1942, Worth assigned all of its right, title, and interest in the above mentioned charter party dated February 10, 1942, to Gillmor and Sherover.
The net income from the operation of the Leslie from March 14, 1941, to February 28, 1942, inclusive, was $ 64,379.15, instead of $ 104,381.44 as determined by the respondent.
Worth's net income for declared value excess profits tax computation as adjusted for the period from March 14, 1941, to February 28, 7 T.C. 654">*663 1942, inclusive, was $ 2,271.75, instead of $ 106,653.19 as determined 1946 U.S. Tax Ct. LEXIS 91">*112 by the respondent.
On December 24, 1941, Worth paid to Gillmor and Sherover jointly a total sum of $ 80,000. On January 14, 1942, Worth paid to Gillmor and Sherover jointly a total sum of $ 15,000.
After the vessel was sunk in 1942, the insurance company paid Worth insurance of $ 296,000. Of this amount, $ 206,250 was paid on August 6, 1942, and the balance of $ 89,750 was paid on December 1, 1942. This sum of $ 296,000 was distributed as follows:
| To Sherover | To Gillmor | To Freeman | |
| First payment | $ 95,359.37 | $ 95,359.37 | $ 15,531.26 |
| Second payment | 39,265.62 | 39,265.63 | 11,218.75 |
| Total | 134,624.99 | 134,625.00 | 26,750.01 |
On January 11, 1943, Worth made the following payments:
| To Sherover | $ 1,194.47 |
| To Gillmor | 1,194.46 |
| To Freeman | 321.48 |
| Total | 2,710.41 |
Nothing was paid to Worth for any of the amounts referred to in the three preceding paragraphs as having been paid by Worth to the individual petitioners.
The exact cash balance remaining on hand in the bank account of Worth on March 26, 1946, was $ 837.48.
OPINION.
Briefly, the issues, as previously stated in greater detail, are (1) whether the net income of $ 64,379.15 realized from the operation1946 U.S. Tax Ct. LEXIS 91">*113 of the S. S. Leslie for the fiscal year period beginning March 14, 1941, and ending February 28, 1942, is taxable to the Worth Steamship Corporation, and (2) whether the individual petitioners are liable as transferees for the taxes and interest due from the corporation.
As to issue (1), the respondent in his brief opens his argument with the statement that "Where income is derived from property, the basic test for determining who is to bear the tax is that of ownership," citing Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601">158 U.S. 601, and Eisner v. Macomber, 252 U.S. 189">252 U.S. 189. We think that statement is fundamentally correct.
Applying that test, however, to the facts set out in our findings, we are unable to conclude that Worth was the owner of the income in question. We think these facts show that the joint venture, consisting 7 T.C. 654">*664 of Sherover, Gillmor, and Freeman, was the real owner of the income. Sherover and Gillmor bought the Leslie and then, because of Freeman's experience as an operator, agreed to sell him a one-eighth interest in the ship. Sherover and Freeman were to operate the vessel for the account1946 U.S. Tax Ct. LEXIS 91">*114 of the three joint venturers at a monthly fee of $ 1,800. These two men then organized Worth and turned over the operation of the Leslie to it for the account of the joint venture at the same monthly fee of $ 1,800. Worth has returned these operating fees on its own income tax return for the taxable period. Freeman suggested that Worth could operate the vessel with more convenience if it also had the record title to the ship. When Sherover and Gillmor purchased the ship the record title was taken in Sherover's name. In response to Freeman's suggestion Sherover transferred such title to Worth without informing Gillmor. It was understood, however, that Worth was merely to operate the vessel, collect the income, pay the expenses, including its own monthly fee of $ 1,800, and turn over the balance to the joint venturers, the beneficial owners of the vessel. These understandings were finally reduced to writing in September 1941 in the forms of the joint venture agreement, the operating agreement, and the declaration of trust. The first two agreements were dated back to March 15, 1941, and the declaration of trust was dated back to April 10, 1941, the date Sherover transferred1946 U.S. Tax Ct. LEXIS 91">*115 the record title to Worth. This was done because these agreements put into writing what had been the oral understanding of the parties. All the business transactions concerning the Leslie were handled in accordance with these agreements. Sherover and Gillmor each received 43.75 per cent of the net income of the ship and 12.50 per cent thereof was received by Freeman. Gillmor was never a stockholder of Worth. The latter issued only $ 100 worth of stock and that was subscribed and paid for and owned equally by Sherover and Freeman. On the basis of the facts, we hold that Worth was not the owner of the income in question.
We think the facts in the instant proceedings bring them within the ambit of such cases as Parish-Watson & Co., 2 B. T. A. 851. In that case four individuals who were members of a joint venture engaged in the business of buying and selling art collections, decided to incorporate the joint venture and make it a permanent business. In the joint venture, all four members were equal participants in a one-half share of certain art objects. In the corporation, however, the four stockholders were to have varying shares in the common1946 U.S. Tax Ct. LEXIS 91">*116 stock. The joint venturers transferred their one-half interest in the art objects to the corporation at their cost under an agreement that the net profits that might thereafter arise from the sale of the art objects so transferred should be paid over to the joint venturers in equal shares, the corporation under no circumstances to have any interest in the net 7 T.C. 654">*665 profits from the sale thereof. In holding that the profits there in question were income to the four joint venturers rather than income to the corporation, we said in part:
* * * If, as contended by the Commissioner, the profits involved herein belonged to the corporation, the four men named would not have had an equal interest therein, since they owned unequal amounts of the common stock of the corporation, and any excess of earnings over the amount necessary to pay dividends on the preferred stock would have been available to pay dividends on the common stock, which is the thing they desired to avoid. * * *
An examination of the record in this case clearly shows that Worth was at no time the beneficial owner of the S. S. Leslie, and the record further shows that the interests of Sherover and Freeman were substantially1946 U.S. Tax Ct. LEXIS 91">*117 different in the joint venture than in Worth and that, while Gillmor had an interest in the joint venture, he had absolutely no interest in Worth. Accordingly, the conclusion is inescapable that, according to the basic test to be applied, that of ownership, Worth is not taxable on the income from the operations of the S. S. Leslie.
The respondent relies principally upon such cases as Higgins v. Smith, 308 U.S. 473">308 U.S. 473, and Moline Properties, Inc. v. Commissioner, 319 U.S. 436">319 U.S. 436. In so doing he disregards entirely the agreements and declaration of trust that were finally signed in September of 1941 and dated back to March and April of that year, and he argues that such agreements were "concocted" and a sham. The evidence does not support such an argument. Sherover, Gillmor, and Freeman all testified at the hearing. Their testimony amply supports the facts as found in our findings and was not shaken on cross-examination. On the basis of such facts, the cases relied upon by the respondent are not applicable.
Likewise, in attempting to distinguish the Parish-Watson & Co. case, supra, the respondent in his1946 U.S. Tax Ct. LEXIS 91">*118 brief says that in that case "the variance of interest of the joint venturers in the joint venture from that in the corporation was legitimate, bona fide and for a valid, reasonable business purpose. In the instant case it was a sham." It was never the intention of Sherover and Freeman that Worth should do any more than operate the vessel for the account of the joint venture, as the individuals Sherover and Freeman had originally agreed to do. Gillmor had nothing to do with the organization of Worth. He was not a stockholder thereof and was interested only in having the Leslie operated for his own account and for the account of the other two joint venturers. This is well substantiated by the record. We, therefore, do not agree with the respondent that in the instant case the variance of interest of the joint venturers in the joint venture from that in the corporation was a sham. We hold that Worth is not taxable on the income from the operation of the Leslie. Cf. Central Life Assur. Soc., Mut. v. Commissioner, 51 Fed. (2d) 939.
7 T.C. 654">*666 In view of our holding on the first issue, the transferee issue becomes of little importance. 1946 U.S. Tax Ct. LEXIS 91">*119 The adjustments to the net income of Worth as shown in the statement attached to the deficiency notice to Worth are as follows:
| Net income as disclosed by return | $ 1,551.75 | ||
| Unallowable deductions and additional income: | |||
| (a) Income from operation of steamship | |||
| "Leslie" | $ 104,381.44 | ||
| (b) Capital stock tax | 95.00 | ||
| (c) Repairs | 500.00 | ||
| (d) Legal fees | 125.00 | 105,101.44 | |
| Net income as adjusted | 106,653.19 |
After eliminating adjustment (a), the adjusted net income is only $ 2,271.75. It is apparent that the recomputation under Rule 50 will probably show no deficiency in declared value excess profits tax, no deficiency in excess profits tax, and only a small deficiency in income tax. On March 26, 1946, Worth had an actual cash balance on hand of $ 837.48, which will probably be sufficient to pay the deficiency in income tax plus interest as provided by law, and the issue of transferee liability becomes of slight importance. However, that issue having been submitted to us under the pleadings, it must be decided. Inasmuch as none of the amounts paid Sherover, Gillmor, and Freeman shown in our findings of fact were paid to them as stockholders of Worth, but were1946 U.S. Tax Ct. LEXIS 91">*120 paid to them because of their rights as joint venturers and under the contracts and agreements to which we have already referred, they did not receive any of the property of Worth, but only their own property. We, therefore, hold that Sherover, Gillmor, and Freeman are not liable as transferees of Worth.
In Docket No. 7698 decision will be entered under Rule 50. In Docket Nos. 7697, 7699, and 7741 decisions will be entered that petitioners are not liable as transferees.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Miles M. Sherover, Transferee, Docket No. 7697; Lewis A. Freeman, Jr. (formerly Louis A. Friedman, Jr.), Transferee, Docket No. 7699; and Daniel S. Gillmor, Transferee, Docket No. 7741.↩