*2576 1. Evidence fails to show that a general retail store conducted by some of the officers of a corporation engaged in the manufacture and sale of specialized commodities is not a business entity separate and apart from the corporation.
2. Held, the petitioner and the Lux Fibre Co. were not affiliated corporations within the taxing statutes, during the year involved.
*893 In these proceedings, which have been consolidated for hearing and decision, the petitioner seeks a redetermination of the additional *894 taxes and penalties which the respondent has asserted for the years shown, as follows:
| 1921, additional tax | $15,743.78 |
| 1922, additional tax | 6,259.40 |
| 1922, penalty | 1,564.85 |
| 1923, additional tax | 1,369.03 |
For its causes of action the petitioner alleges that the respondent erred (1) in reducing its invested capital for the year 1921 by excluding therefrom the sum of $16,372.67, representing paid-in surplus; (2) in restoring to its gross income, for each of the years, amounts representing alleged business losses incurred*2577 by it in the operation of a branch store at 804 Walnut Street in Kansas City, Mo.; (3) in denying petitioner's claims of affiliation during 1922 with the Lux Fibre Co.; and (4) in imposing against it a delinquency penalty of $1,564.85 for delayed filing of its return for 1922.
FINDINGS OF FACT.
The petitioner is a Missouri corporation, with its principal office at Kansas City. It was incorporated in July, 1907, for purposes declared in its articles of association, as follows:
Seventh. The purposes for which this corporation is formed are to manufacture tents, awnings, screens, bags, flags, decorations, tent furniture, implements, canvas and leather goods, and other like or appurtenant commodities, and to deal in the same for themselves or on commission and in the materials thereof; and to that end and in connection therewith to acquire, hold, lease, and dispose of real estate, buildings and factories; to acquire, hold, use, and dispose of, patents and territorial rights therein; to borrow money upon security, and in general to do each and every thing which is requisite or necessary for carrying out the purposes and powers of this corporation.
Sometime in 1913 the petitioner*2578 entered into an agreement with the R. L. Kenyon Co., through which it obtained ready-made frames suitable for the mounting of tents manufactured and sold by it. Later, in 1915, it acquired ownership or control of some of this company's stock, in amounts not shown, and caused its treasurer, L. R. Goudie, to be elected a director and vice president of the Kenyon Co. In 1918 this company, whose name had been changed to "The Lux Fibre Company," encountered financial difficulties which threatened to force it into liquidation. In this extremity the petitioner advanced it $50,000, and at the same time acquired an option to purchase the remainder of its stock. This option was exercised later. During the years in question the ownership of its common and preferred stock was divided between the petitioner and minority stockholders, as follows:
| Total shares outstanding | Carnie-Goudie Mfg. Co. control | Minority holdings | |
| Preferred stock | 503.25 | 390.00 | 113.25 |
| Common stock | 977.06 | 730.32 | 246.74 |
| Total | 1 1,480.31 | 1,120.32 | 359.99 |
| Ratio to total | per cent 100.00 | 75.68 | 24.32 |
*895 *2579 In the latter part of 1920 the petitioner found itself possessed of a large surplus stock of secondhand army goods not readily salable at its regular place of business on Grand Avenue in Kansas City. To relieve this situation it opened branch sales rooms in its warehouse at Fifth and Highland Avenues, and removed some of its surplus stock there. It also leased premises at 804 Walnut Street, on which was located a three-story brick building suitable for merchandising purposes, which it remodeled and stocked with goods, taken in part from its main store and in part purchased in the market. This lease was for a term of five years beginning January 1, 1921, and provided for an annual rental of $9,600 to be paid by petitioner in monthly installments, with renewal privileges. This lease was executed by the petitioner in due corporate form, on November 24, 1920, and although the rentals provided for did not begin to run until January 1, following, it included a proviso which allowed the petitioner to take immediate possession of the premises. Immediately following the execution of the lease, the petitioner announced its plans with respect to the character of the mercantile business to*2580 be carried on by it there, in a full-page advertisement which it caused to be inserted in the Kansas City Star on November 26, 1920. This advertisement carried a photographic cut of the building, showing location, etc., and of numerous articles of army goods, blankets, shoes and children's toys. At the top of this page was superimposed the following announcement:
GREATEST MONEY SAVING SALE IN HISTORY OF KANSAS CITY!
America's Greatest Merchants Are Forced To Turn Immense Stocks Of Brand New Shoes, Toys, Etc., Into Quick Cash!
They investigated scores of concerns throughout the country to determine the best possible connection. These progressive merchants decided only one could handle such an enormous sale. Other merchants would not handle because the low prices would demoralize their regular stocks, bought at high prices. The Carnie-Goudie Co. was selected because of reputation, financial responsibility, square business methods, location and ability to dispose of merchandise in any quantity in their wholesale and retail business. Never before in the history of Kansas City has there been such a remarkable offer on dependable merchandise *896 at such money-saving*2581 prices. See the goods! Note our prices! Nobody will even attempt to dispute our claims. Money Back Guarantee on each and every item offered for sale.
(Signed) CARNIE-GOUDIE CO.
The store was opened for business about December 1, 1920, and was placed in the charge of one Howell, whose prior connections are not shown. L. R. Goudie, treasurer of the petitioner, however, edited the advertisement hereinabove noted and from time to time assisted at the new store and partly directed its affairs. C. R. Goudie also at odd times gave some personal attention to the store on Walnut Street, and at times, during rush hours, help from petitioner's store at 22nd and Grand Avenues was called in to assist in taking care of the trade. Soon after opening the store on Walnut Street the officials of the petitioner decided that the new and diversified class of merchandise it was obliged to carry and the trade methods it was forced to adopt to make this store a success involved such a drastic departure from its established policy that a continuance thereof, under the firm name, might be injurious to its established trade. They, therefore, decided to abandon the use of the corporation's name*2582 and to operate the branch store as a partnership composed of L. R. Goudie, C. R. Goudie, and G. W. Goudie. Accordingly, on December 3, 1921, the petitioner inserted in the Kansas City Star a full-page advertisement similar in form and import to the one hereinbefore noted, except that the firm name "Goudie Brothers" appeared as owners thereof in lieu of that of the petitioner. Books of account were separately kept at this store of the business transacted there, under the name of "Goudie Brothers," as well as bank accounts in various banks in Kansas City. The operations at this store for the month of December, 1920, resulted in a net profit of $2,174.35, which was divided equally among the three Goudie brothers and entered the their credit on the general ledger of the putative partnership.
In March, 1921, a partnership income-tax return was filed with the collector of internal revenue at Kansas City, Mo., for Goudie Brothers, in which the net income for 1920 and distribution as above noted were reported. This return was signed and sworn to by L. R. Goudie, petitioner's treasurer, as one of the copartners in such firm.
An insurance policy was taken out by the petitioner, covering*2583 the stock of goods in the store at 804 Walnut Street, and insuring the same against loss from burglary. Upon the renewal of this policy, on November 26, 1921, the name of the "insured" was changed by petitioner's broker from Carnie-Goudie Manufacturing Co. to "Goudie Brothers (Geo. A., and Chas. R., and LeRoy Goudie)," in which name it was thereafter continued to and including *897 the year 1923. In december, 1922, this store was broken into and a quantity of goods stolen therefrom. In a suit, brought by "Goudie Brothers" against the insurance company for the recovery for this loss, in the Circuit Court of Jackson County, Mo., the plaintiffs in their petition described their firm as: "George A. Goudie, Charles R. Goudie and LeRoy Goudie, doing business as Goudie Brothers, a copartnership," and, as such, recovered a judgment in the sum of $5,292.89, which was thereafter affirmed.
For the year 1921 the operations of Goudie Bros. resulted in a net loss of $68,310.38. This loss was carried forward into their profit and loss account for 1922. The year 1922 resulted in a similar loss of $38,000, which was likewise carried forward as an opening entry in the profit and loss*2584 account for the succeeding year. The same process was followed in accumulating the losses for the years 1923, 1924, and 1925, when the lease expired, after which the business was closed out and liquidated by the petitioner. After the closing of the Walnut Street store the petitioner removed the books and records of the transactions carried on there to its offices at 22nd and Grand Avenue, and consolidated such accounts with those involved in its operations at the latter place.
In making up its income and profits-tax returns for 1921, 1922, and 1923, the petitioner treated the business carried on at the Walnut Street store as its own and reduced its gross income for each year by the amount of the loss sustained in the operation of such store. It also claimed affiliation during 1922 and 1923, with the Lux Fibre Co. The petitioner filed a tentative income and profits-tax return for 1922 on March 15, 1923. Thereafter a general extension was granted for the filing of returns for 1922, until June 15, 1923. The petitioner filed its completed return for this year on June 29, 1923. In auditing such returns the respondent restored to petitioner's reported gross income the several amounts*2585 claimed as business losses from the operations of the store at 804 Walnut Street, denied its claims of affiliation with the Lux Fibre Co., and asserted a penalty of $1,564.85 for delinquency in filing its 1922 return.
OPINION.
LANSDON: At the hearing of these proceedings the respondent confessed error in reducing the petitioner's invested capital for 1921 in the amount of $16,372.67, which should be restored thereto in the recomputation of any deficiency herein redetermined. Three other questions are presented for our determination, viz, (1) the status of the firm known as "Goudie Brothers" as a business entity; (2) the relationship between the petitioner and the Lux Fibre Co. as to *898 being affiliated corporations within the taxing statutes during the years in question; and (3) whether the delinquency penalty for 1922 should be imposed.
In respect to the first of these questions, regardless of the original purpose of the petitioner in opening the store at 804 Walnut Street, the record clearly shows that at some time prior to the expiration of its first month's operation, the petitioner decided to change its plans and thereafter to conduct this business under the*2586 guise of a partnership to be known as "Goudie Bros. Co-partners." In doing this it denies any intent on the part of itself or the three Goudie brothers to effect a partnership, but admits that it deliberately made the change for the specific purpose of leading the public to believe that such a partnership had been formed and that it, and not the corporation, was the owner and operator of said store. The reasons given for this change in plans seem reasonable, so far as business reasons go, but they would be equally good to support the partnership theory, as contended for by respondent.
The question here, after all, is not so much as to what the petitioner and its officials, in whose names the so-called partnership was conducted, thought they were creating when they projected this fictitious firm into the field of retail merchandising as to what they in fact did create. The record clearly shows that they intended the public to believe that the retail store on Walnut Street was being conducted by the three Goudie brothers as copartners. The books show that the profits from this business for 1920 were divided equally between L. R. Goudie, C. R. Goudie and G. W. Goudie, as partners. *2587 They also show that this firm paid, for the single month that it operated in that year, $1,500 as rent, whereas the lease under which the petitioner acquired possession of these premises, called for no rentals until January 1, 1921, and then at the rate of $800 per month only.
The petitioner's auditor, who had audited its books for many years and was familiar with its business, prepared the income-tax return for the business conducted at this store, and this return, which is signed by petitioner's treasurer, certified that the business is owned and conducted by "Goudie Bros. Co-partners." It sets forth the names of these partners and also shows the profits for 1920, as having been distributed as above stated. The insurance policy on the goods in stock was also changed to show this alleged partnership as being owners of this business; and payment thereunder for losses sustained thereafter was collected by the alleged partners in a suit brought in their names as such. Had these individuals been sued at this time, as copartners, for the debts of this Walnut Street store, it is difficult to see how they could have successfully *899 defended themselves upon the theory that*2588 they were not partners, since their liability to third persons depends, not upon their relations inter se, but upon what they represent themselves to be. In other words, their acts, not their intentions, make them partners in contemplation of law. ; ; ; ; ; .
Notwithstanding the testimony that the Goudie brothers did not contemplate the formation of a partnership in fact, it is not clear that such was not their intention from the first. The record discloses that the Walnut Street store earned substantial profits in the first taxable period of its operation, and that such profits were not taken into the income of the corporation but were shared equally by the three Goudies as the distributable net earnings of a partnership. Carnie, who was the owner of a substantial stock interest in the corporation and one of its directors, received no part of such profits, either directly as a partner or indirectly as a stockholder*2589 of the corporation. This seems to indicate that the Goudies contemplated a partnership, the profits of which were not to be shared either with the corporation or the other officers thereof. The Commissioner has disallowed the deduction claimed on the theory that the Walnut Street store was a separate business conducted by the three Goudie brothers. We think the evidence adduced by the petitioner fails to overcome the presumption that his determination is correct.
Petitioner claims that it was affiliated with the Lux Fibre Co. during 1922. The two tests for determining affiliation, provided for in the taxing statute, are (1) the ownership or control, directly or through closely affiliated interests or a nominee or nominees by a corporation of substantially all the stock of another corporation, or (2) the ownership or control by the same interests of substantially all of the stock of the two corporations. The petitioner owned "approximately" 78 per cent of the stock of the Lux Fibre Co. during 1920. Such, we have previously held, does not constitute such "ownership or control" as to satisfy the second statutory test for determining affiliation for tax purposes. *2590 ; ; . Cf., also, . Petitioner says, however, that, because of a loan made by it to the Fibre Co. and an option held giving it the right to purchase the remainder of that company's stock, control over the economic affairs of the Fibre Co. was surrendered to its officers, by reason of which they dominated such company; and argues that domination and control of the affairs of the Fibre Co. during said year affiliated the two corporations within *900 the purview of the Act. We do not know what interests, power, control or obligation the petitioner acquired or assumed by virtue of the option, since it is not in evidence. Even if the stock certificates covered thereby were surrendered to the Fibre Co. and placed in escrow, it does not follow that the petitioner exercised any voting control or any other sort of control thereof except the right to buy under certain conditions that are not disclosed by the record and which on the facts we must conclude was*2591 not exercised until after the close of the taxable period. In our opinion the evidence falls far short of proof that by reason of its option the petitioner controlled the stock owned by the minority interests of the Lux Fibre Co.
The petitioner's treasurer, L. R. Goudie, was, during this period, vice president of the Fibre Co., and attended most of the meetings of its board of directors. He testified that he "practically" dominated the affairs of this company and that there was never any objection raised by other members of the board to his control. Assuming, for present purposes, that the witness, in the conclusions expressed, correctly measured the extent of his control over the affairs of the Fibre Co., we are unable to consider it material here, in view of our previous holdings that control of a corporation is unimportant in the absence of the control of the voting stock. ; . The action of the respondent in holding that the petitioner and the Lux Fibre Co. were not affiliated corporations in the taxable year is sustained.
Section 3176 of the Revised*2592 Statutes provides for a 25 per cent delinquency penalty "except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax." Petitioner admits that its tax return for 1922 was not timely filed. As explanation therefor it shows that such return was made out in time, but due to the oversight of some employee was not at once filed and that as soon as the oversight was discovered it was corrected. An examining agent testified that the petitioner has a good reputation for meeting its tax bills and that in his opinion the failure to file on the due date was a mere oversight and that there was no willful neglect. We are satisfied that the delay was not due to willful neglect. The penalty for delinquency should not be collected.
Reviewed by the Board.
Decision will be entered under Rule 50.
*901 TRAMMELL, dissenting: In my opinion, the evidence shows that the general retail store was in fact not a partnership. It may well be that under the facts the individuals could in a proper case have been held liable as partners, *2593 but this fact is not material. They must have been so in fact if the tax liability is to be determined on that basis. In my opinion, the evidence shows that in fact the individuals did not operate as a separate business.