1931 BTA LEXIS 1730">*1730 Where a copartnership, under and in accordance with the provisions of section 229 of the Revenue Act of 1921, elects to have its income for the calendar year 1921 taxed as the income of a corporation is taxed, the respondent's action in asserting a deficiency for 1921 against the copartnership's successor, a corporation, is erroneous.
23 B.T.A. 1320">*1320 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1921 in the amount of $39,954.22. Petitioner originally set forth two allegations of error, but, as one of said allegations was abandoned at the hearing, we have left for decision the issue of whether respondent is erroneously and illegally attempting to impose a tax on petitioner which, if due at all, is due and owing by parties other than petitioner and for a year prior to the time that petitioner was organized.
23 B.T.A. 1320">*1321 The respondent by amended answer affirmatively alleged that the corporation, the copartnership and the individuals thereof agreed and duly1931 BTA LEXIS 1730">*1731 exercised the option granted by section 229 of the Revenue Act of 1921, and that pursuant to such agreement and option the corporation, the copartnership and the individuals filed tentative and final returns for 1921 as if said corporation had been in existence as a corporation on and after January 1, 1921, and that in accordance with such agreement and option so exercised, the respondent had asserted the deficiency against the corporation.
FINDINGS OF FACT.
The petitioner is a California corporation, incorporated under the laws of that State on or about March 6, 1922.
The petitioner's predecessor in business was a copartnership composed of Dan Murphy and R. J. Dillon who, as partners, operating under the firm name and style of Dillon & Murphy, had been chiefly engaged since about 1915 in purchasing and transmitting natural gas under private contracts.
At the first meeting of the board of directors of the petitioner, composed of C. G. Bullis, H. K. Bagley and M. R. Doak, the minutes of said meeting show that Murphy and Dillon submitted an offer to sell, assign, convey and deliver to the petitioner, as of the first day of January, 1922:
* * * all of the rights of way, 1931 BTA LEXIS 1730">*1732 easements, franchises, permits to use and occupy real property, pipe lines, pipes, meters, contracts for the purchase and delivery of natural gas, book accounts notes receivable, cash on hand and all other of the assets, property and equipment owned, used and employed by said Dan Murphy and R. J. Dillon in the conduct of the business of purchasing natural gas and of delivering such natural gas to Industrial Fuel Supply Company and Southern Counties Gas Company within the County of Los Angeles and within the County of Orange, State of California, together with the good will of said business. Said offer provided that all of said business, property, assets and equipment were to be sold, conveyed, transferred and delivered to this corporation [petitioner] as of said first day of January, 1922, subject, however, to all of the then outstanding obligations and liabilities of said Dan Murphy and R. J. Dillon in the conduct of said business.
Said offer also provided that the consideration for the conveyance, transfer and assignment of the following of said assets, viz: - Pipe lines, pipes, valves, fittings, meters, regulators, transmission and service equipment, tools, books, accounts, 1931 BTA LEXIS 1730">*1733 bills receivable and all fixed investment and physical property should be the sum of $160,068.41 in Gold Coin of the United States * * *.
The aforementioned consideration was payable as follows: $40,068.41 on or before January 1, 1925, which sum was represented by a book account upon petitioner's books in favor of the partners, and the balance, to wit, $120,000, was represented by twelve equal promissory notes of the petitioner dated March 9, 1922, payable respectively 23 B.T.A. 1320">*1322 on the second day of each of the months of January, April, July, and October of each year commencing with the year 1925, together with interest from and after January 2, 1925, at the rate of 7 per cent per annum.
In addition to the monetary consideration the offer provided that petitioner should issue to Dan Murphy and R. J. Dillon 1,500 shares of its fully paid-up capital stock in consideration for the conveyance, transfer, and assignment of all the francises, good will, and purchase and sale contracts of said Dan Murphy and R. J. Dillon.
By appropriate corporate action the offer of Dillon and Murphy was accepted and the business and assets of the partnership were acquired by the petitioner, "subject1931 BTA LEXIS 1730">*1734 to the obligations and liabilities of said business on said date outstanding."
Pursuant to the terms and provisions of section 229 of the Revenue Act of 1921, the partnership of Dillon and Murphy elected to have its 1921 net income taxed as the net income of a corporation is taxed.
On or about March 15, 1922, the corporation filed a tentative return for the calendar year 1921, requesting an extension of time until June 15, 1922, to file a complete return because no blanks in the form required by the Government "were available until too late to make up a complete return, especially as the corporation making this return has recently been organized by the members of a partnership to succeed to the partnership business and necessary readjustments of accounting and determination of items required for return as a corporation will require more time than is now available."
On or about June 15, 1922, the petitioner corporation executed and filed a complete income and profits-tax return for the calendar year 1921, reporting thereon a net income of $37,786.30 and a total tax of $6,972.49. No other return or returns on income of the partnership for 1921 were filed, nor did the partners1931 BTA LEXIS 1730">*1735 report any amount on their individual returns for 1921 as income received from the partnership of Dillon & Murphy. In discharge of the obligation shown on the 1921 return, the collector of internal revenue received a check from the petitioner.
Attached to the complete return, as schedule E thereof, is the following statement:
This corporation was organized after the 31st day of December, 1921, but within the time limited by the Revenue Act of 1921, to take over the business and properties of the partnership of Dillon and Murphy of Los Angeles, California. The properties consist of certain oil land leases and certain pipes and pipe lines used for the transmission of gas under private contracts. There has been no capital stock issued prior to the end of the taxable period of this return and the statements as made and balance sheet as submitted in Schedule K are as of the books of said partnership for the taxable period. The item of invested Capital as used in this return is as carried upon the books of the predecessor partnership being the average actual cost value of the fixed assets 23 B.T.A. 1320">*1323 for the taxing year less the depreciation as written off together with the actual1931 BTA LEXIS 1730">*1736 book value of the intangible assets such as contracts, good will and franchises as carried on the books of such partnership. The ownership and control of the shares of the capital stock and of the business of this reporting corporation is identical with that of the predecessor partnership, all of the assets of the partnership having been transferred to the corporation, which in turn issued to the partners shares of stock and assumed the partnership liabilities. There is no ownership of stock in the corporation which does not represent an identical ownership in the partnership.
In subsequent correspondence between respondent and the corporation and in all matters relating to income and profits taxes for 1921 and 1922, the corporation dealt with the question of liability for income and profits taxes during these years as if it were the taxpayer.
OPINION.
MORRIS: Both parties in this proceeding are relying upon the provisions of section 229 of the Revenue Act of 1921 as determinative of the issue presented. The said section provides:
That in the case of the organization as a corporation within four months after the passage of this act of any trade or business in which capital1931 BTA LEXIS 1730">*1737 is a material income-producing factor, and which was previously owned by a partnership or individual, the net income of such trade or business from January 1, 1921, to the date of such organization may at the option of the individual or partnership be taxed as the net income of a corporation is taxed under Titles II and III; in which event the net income and invested capital of such trade or business shall be computed as if such corporation had been in existence on and after January 1, 1921, and the undistributed profits or earnings of such trade or business shall not be subject to the surtaxes imposed in section 211, but amounts distributed on and after January 1, 1921, from the earnings or profits of such trade or business accumulated after December 31, 1920, shall be taxed to the recipients as dividends; and all the provisions of Titles II and III relating to corporations shall so far as practicable apply to such trade or business: Provided, That this section shall not apply to any trade or business, the net income of which for the taxable year 1921 was less than 20 per centum of its invested capital for such year: Provided further, that any taxpayer who takes advantage1931 BTA LEXIS 1730">*1738 of this section shall pay the tax imposed by section 1000 of the Revenue Act of 1918 as if such taxpayer had been a corporation on and after January 1, 1921.
The respondent here is asserting a deficiency against the corporation, which, as party petitioner, has brought this proceeding alleging that it has been illegally and erroneously determined that it, the said corporation, is the proper taxpayer with respect to income and profits taxes for 1921. Petitioner has adduced evidence proving that its legal existence began on or about March 6, 1922, and contends, therefore, that it could not have had taxable income during the calendar year prior to its birth.
The respondent has countered by affirmatively alleging that the petitioner is liable for the taxes on the 1921 income of its predecessor, 23 B.T.A. 1320">*1324 the copartnership of Dillon & Murphy, by virtue of an agreement which he alleges existed between the petitioner, the copartnership, and the individual members thereof with respect to said taxes. Respondent has introduced numerous documents into evidence in an effort to prove the existence of said alleged agreement. In our opinion the existence of the alleged agreement, or its1931 BTA LEXIS 1730">*1739 absence, is a matter with which we have no concern, because even if it existed in fact, such an agreement could not change the liability imposed by the statute. . In our opinion, therefore, respondent's position with respect to the effectiveness of the alleged agreement in fixing the tax liability is not well taken.
This same issue, minus the affirmative allegations of respondent, was considered by the Board in , wherein, after quoting section 229 of the Revenue Act of 1921, we stated (p. 1099):
The decision turns upon a construction of the statute. Exclusive of the conditions an individual or partnership must meet to obtain the benefits of the law, about which no question is being made, the statute provides, in effect, that where a trade or business of an individual or a partnership is incorporated within four months after the passage of the Act, the net income of such trade or business from January 1, 1921, to the date of incorporation, may, at the option of the individual or partnership, be taxed as the net income of a corporation is taxed. There is nothing in the statute1931 BTA LEXIS 1730">*1740 relieving the individual of his liability for the tax after it has been determined in the manner provided for therein, or indicating an intention that the tax should be imposed upon the corporation organized to take over the business of the individual. Had Congress intended to make the newly formed corporation, rather than the individual, liable for the tax on the income of the business from January 1, 1921, to the date of its organization, it certainly would not have limited the application of Titles II and III of the 1921 Act in the calculation of the tax, or required the individual exercising the option to pay the capital stock tax imposed by section 1000.
Respondent argues that the Ward case is inapplicable because the facts show that this petitioner waived all of its rights and objections, which it might have been entitled to assert, by filing the 1921 return in its own name, paying the tax shown due thereon, and continuously representing itself to respondent as being liable for the tax. Virtually the same argument was advanced in the Ward case by respondent under the defense that petitioner was estopped to deny liability. In answer thereto the Board stated that1931 BTA LEXIS 1730">*1741 while the individual might benefit from the decision, we knew of no way whereby petitioner could be compelled to report and pay a tax on income which it did not in fact receive, or how it could be estopped from showing what the true facts were.
Decision will be entered for the petitioner.