Petitfils v. Commissioner , 24 B.T.A. 1090 ( 1931 )

WALTER M. PETITFILS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Petitfils v. Commissioner

Docket No. 37763.

United States Board of Tax Appeals

24 B.T.A. 1090; 1931 BTA LEXIS 1543;

December 7, 1931, Promulgated

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">*1543 Claude I. Parker, Esq., George H. Koster, Esq., and J. B. Milliken, Esq., for the petitioner.

J. E. Marshall, Esq., for the respondent.

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MATTHEWS

">*1090 This proceeding is for the redetermination of a deficiency in income tax for the year 1923 in the amount of $15,911.42. It is alleged in the petition that the respondent erred in asserting that the petitioner sold certain assets or any assets to Petitfils Confiserie, a corporation, during 1923. The sole issue presented is whether the profit on the sale of certain assets was taxable income to the petitioner.

FINDINGS OF FACT.

Petitioner is an individual, with his principal office at 1128 West Seventh Street, Los Angeles, Calif.

For several years prior to 1923 petitioner was engaged in operating as an individual a cafe and confectionery at 613-615 South Broadway, Los Angeles. The business was originally conducted under the name of "Petitfils." In 1922 petitioner contemplated transferring his business to a corporation to be organized. He was using the name "Petitfils Confiserie" on the candy boxes and also had that name on the sign over the store.

Petitioner occupied the property at">*1544 613-615 South Broadway under a lease entered into on December 29, 1919, which provided that petitioner as lessee might assign the whole or any part of the lease, or sublet the whole or any part of the premises to any tenant satisfactory to the lessor; such assent of the lessor to be obtained in writing. On June 12, 1922, the lessor, S. Tilden Norton, consented to the transfer of the lease of Petitfils Confiserie, Inc., it being specified that the monthly rental would be increased, and certain other terms and conditions being set out. It was expressly stated that this consent should be attached to and become a part of the lease.

In May, 1923, petitioner caused to be organized under the laws of California a corporation to be known as W. M. Petitfils, Inc., the articles of incorporation being dated May 1, 1923. The capital stock of the corporation was stated to be in the amount of 5,000 shares of the par value of $100 each. Petitioner and his wife and his sister each subscribed for one share of stock and became president, vice president, and secretary, respectively, of the corporation.

">*1091 On May 8, 1923, the petitioner addressed to W. M. Petitfils, Inc., the following">*1545 communication:

I hereby offer to transfer, sell and assign to you the assets included in the statement hereto attached, and which total $2,053,129.14, subject to liabilities amounting to $613,477.98, with which assets you are familiar, in consideration of your issuing to me, or my nominees, $450,000.00 par value of the capital stock of your corporation, fully paid.

The attached statement of petitioner's assets and liabilities as of May 4, 1923, reads as follows:

Assets
Cash on hand and in bank	$23,643.93
Notes Receivable	12,250.00
Mortgage Receivable	6,250.00
Accounts Receivable	1,298.17
Tenants Security on Lease	2,500.00
Stocks and Bonds	18,525.00
Inventory Mdse. at 613 So. Broadway	21,759.29
Equipment (613 So. Broadway)	51,485.57
Automobile (Lincoln Car)	5,000.00
Land & Improvements (West 7th St. Property)	1,500,000.00
North Beachwood Drive	12,619.05
Leasehold (613 So. Broadway)	210,000.00
Goodwill (Business at 613 S. Broadway)	180,000.00
Prepaid Insurance	1,214.22
Interest Accrued	322.90
Advanced Rents (613 S. Broadway)	6,000.00
Advanced Taxes	261.01
Total	2,053,129.14
Liabilities
Mortgage Payable (West 7th St. Property)	$525,000.00
Accounts Payable (Mdse. at 613 S. Broadway)	18,481.22
Taxes Payable (Income Taxes)	34,404.88
Advanced Rents	2,500.00
Notes Payable (Veda Petitfils)	29,000.58
Accrued Payroll (613 S. Broadway)	4,091.30
Net Worth	1,439,651.16
Total	2,053,129.14

">*1546 On May 9, 1923, the following response was directed to the petitioner:

We hereby accept the offer made by you to this corporation under date of May 8th, 1923, and agree to issue $450,000.00 par value of the capital stock of this corporation to you, or your nominees, when permission so to do is obtained from the Commissioner of Corporations of the state of California.

The permit from the commissioner of corporations to W. M. Petitfils, Inc., to issue its stock was dated several months after May, 1923. One share of stock was issued to Anna S. Petitfils and one share was issued to Veda M. Petitfils and the balance of 4,498 shares was issued to the petitioner.

About the time of the acceptance by W. M. Petitfils, Inc., of petitioner's offer to transfer to it all his assets, journal entries were made on petitioner's books as of April 30, 1923, and opening journal entries were made on the books of W. M. Petitfils, Inc., as of May 1, 1923, which entries recorded the transfer of petitioner's assets to the corporation. The opening journal entries on the books of W. M. Petitfils, Inc., as of May 1, 1923, showed "unissued capital stock" in the sum of $500,000 and "capital stock authorized" ">*1547 in the same amount. ">*1092 There is listed as a credit item to W. M. Petitfils, the petitioner, unissued capital stock in the sum of $450,000 and a paid-in surplus amounting to $1,088,800.

There was also organized under the laws of the State of California a corporation to be known as Petitfils Confiserie, the articles of incorporation being dated May 11, 1923. The capital stock of the corporation was stated to be in the amount of 20,000 shares of the parvalue of $100 each.

On May 15, 1923, the petitioner addressed the following communication to W. M. Petitfils, Inc.:

Under the terms of the lease which I have on the property known as 613-15 South Broadway, Los Angeles, there is a provision that the lease is not assignable to anyone without the consent of the lessor except to a corporation to be known as PETITFILS CONFISERIE.

Without either of us noticing that provision your corporation and myself entered into a contract, as evidenced by my offer of May 8th, 1923, and your acceptance of May 9th, 1923, by the terms of which I agreed to convey to you certain assets, including said lease and business at that location.

In order that the consent of the lessor will not">*1548 have to be obtained to make the assignment to you, which I am sure, will only be obtained for quite a sum of money, we are now organizing a corporation under the name of PETITFILS CONFISERIE, for the purpose of acquiring said business and lease from me, and I am writing to inquire if it will be satisfactory to your corporation to have me offer to transfer, sell and assign said business and lease to such corporation to be known as PETITFILS CONFISERIE, for the consideration of $315,000.00 par value of the capital stock of that corporation and a promissory note of that corporation payable to me in the principal sum of Two hundred fifty thousand dollars ($250,000.00), which stock and note, when received by me, will of course be your property, in accordance with our agreement.

I shall appreciate an early reply.

Under date of May 16, 1923, W. M. Petitfils, Inc., advised petitioner that the plan outlined by him was satisfactory, as follows:

The above is satisfactory to us provided that at the proper time you execute and deliver to us a declaration of trust, showing that what you transfer to PETITFILS CONFISERIE, a corporation, is really our property, and that what you receive from">*1549 that corporation will be our property, and also that you will make the conveyance of what you receive upon our demand.

On May 24, 1923, petitioner addressed the following communication to Petitfils Confiserie:

I am the owner of the business which I have been conducting at 613-615 South Broadway, Los Angeles, California, under the name of "PETITFILS," and I hereby offer to transfer, sell and assign the same, together with all fixtures, merchandise, equipment, lease, good-will, and all other rights and assets thereof, and with all of which you are familiar, to you for $250,000.00 plus 3150 shares of the capital stock of your corporation, fully paid.

The first money received from the sale of your stock, after the commissions and other expenses of such sale are paid, shall be applied upon the payment of said note.

">*1093 I will transfer and assign said assets to you upon your acceptance of this offer, the receipt by me of said stock, and a promissory note signed by your corporation, due on demand, in the said sum of $250,000.00, without interest, and providing for the payment of attorney's fees, in case suit is instituted.

On May 24, 1923, the Brown Candy Corporation, ">*1550 which operated three candy stores in Los Angeles, offered to transfer its business and the leases, with all the assets of the corporation, including good will, to Petitfils Confiserie for 5,000 shares of the fully paid capital stock of Petitfils Confiserie.

Both of these offers were accepted by Petitfils Confiserie, according to the terms thereof.

Under date of June 16, 1923, at a special meeting of the board of directors of Petitfils Confiserie, it was announced that the corporation had just received a permit from the commissioner of corporations authorizing it to issue 20,000 shares of its capital stock. Upon motion it was resolved that the officers of the corporation be authorized and directed to do everything necessary to carry out the terms of the agreement with W. M. Petitfils and the Brown Candy Corporation and the permit issued by the commissioner of corporations.

The assets which the petitioner offered to transfer to Petitfils Confiserie, as set out in his letter dated May 24, 1923, were delivered to Petitfils Confiserie, and 3,150 shares of the capital stock of this corporation, together with the corporation's promissory note in the sum of $250,000, were given to">*1551 the petitioner.

On June 18, 1923, petitioner executed the following instrument:

KNOW ALL MEN BY THESE PRESENTS:

That W. M. Petitfils, of Los Angeles, California, hereinafter for convenience called Trustee, acknowledges having received and accepted thirty one hundred and fifty (3150) shares of the capital stock of the Petitfils Confiserie, a corporation organized and existing under the laws of the state of California, together with the promissory note of said corporation in the sum of Two Hundred Fifty Thousand ($250,000.00) Dollars, dated June 18th, 1923, payable six months after date thereof.

That nothing was paid by said Trustee for said property, and said Trustee holds and will hold the right, title and interest in said property for W. M. Petitfils, Inc., a corporation organized and existing under the laws of the state of California, in accordance with the terms of a contract entered into by W. M. Petitfils with W. M. Petitfils, Inc., a corporation, as evidenced by the offer to said corporation of W. M. Petitfils, dated May 8, 1923, and the acceptance of said offer by W. M. Petitfils, Inc., a corporation, upon the 9th day of May, 1923, as modified by that certain communication">*1552 dated the 15th day of May, 1923, and that the capital stock of the said Petitfils Confiserie, a corporation, and the promissory note above mentioned, is and was at all times the property of the corporation, W. M. Petitfils, Inc., and that W. M. Petitfils at no time has had any interest therein except as such Trustee.

On June 21, 1923, petitioner executed the following instrument:

FOR VALUE RECEIVED, I hereby transfer, sell and assign to PETITFILS CONFISERIE, a corporation, the attached lease dated December 29th, 1919, between ">*1094 S. TILDEN NORTON, as LESSOR, and myself as LESSEE, covering the premises known as 615 South Broadway, Los Angeles, and also all right, title and interest in and to the consent to such assignment by S. TILDEN NORTON, which is dated June 12th, 1922, and which is also attached.

Journal entries on the books of W. M. Petitfils, Inc., as of June 18, 1923, show a transfer of the assets in question and the receipt of stock of Petitfils Confiserie in the sum of $315,000 and notes receivable in the sum of $250,000.

In its income-tax return for 1923 W. M. Petitfils, Inc., reported income from the operation of the restaurant and candy manufacturing">*1553 business from May 1, 1923, to June 17, 1923. The income from the operation of this business from January 1 to May 1, 1923, was reported by the petitioner in his individual tax return for 1923. Petitioner did not report any profit on the sale of the assets which had been owned by him individually and which had been used in carrying on the business which he had conducted as an indivdual at 613-615 South Broadway.

The respondent increased the petitioner's net income for 1923 by $169,721.81, which sum he found to represent profit from the sale of assets to Petitfils Confiserie, and determined the deficiency which is involved herein.

OPINION.

MATTHEWS: The only issue raised in this proceeding is whether the profit realized upon the sale of certain assets to Petitfils Confiserie, including the leasehold, the tangible property and the good will of the business which had been conducted by the petitioner individually at 613-615 South Broadway, Los Angeles, Calif., was income to the petitioner. It is the petitioner's contention that he transferred the assets in question to W. M. Petitfils, Inc., and thereafter acted as trustee or agent for W. M. Petitfils, Inc., in disposing of these">*1554 assets to Petitfils Confiseri. The respondent questions the bona fides of the purported sale from petitioner to W. M. Petitfils, Inc., and further contends that the offer and acceptance under the circumstances were insufficient to pass title to W. M. Petitfils, Inc. It is also claimed by the respondent that for all intents and purposes petitioner and W. M. Petitfils, Inc., were one and the same entity and that petitioner did not contemplate that he should be deprived of anything by the organization of W. M. Petitfils, Inc.

The assets which petitioner agreed to transfer to W. M. Petitfils, Inc., in exchange for the capital stock of that corporation were listed by him as having a net worth of $1,439,651.16, and included property owned by him other than that used in connection with the operation of the cafe and confectionery business at 613-615 South Broadway.

">*1095 The record indicates that the petitioner's object in organizing W. M. Petitfils, Inc., was to protect the business which he had been successfully operating as an individual and to turn over to that corporation all of his assets. Petitioner testified that he had considered the matter for perhaps two years">*1555 before deciding to incorporate "himself," and that because of the size of the business he thought it best for himself and for his business to operate it through the corporation. Petitioner further testified that he did not remember whether he executed a bill of sale conveying the assets involved herein to W. M. Petitfils, Inc., and that it did not make any difference because it was a personal affair.

We think it is clear that although petitioner may have intended to turn over all his assets to W. M. Petitfils, Inc., at the time this corporation was organized, the proceedings taken by him were not legally adequate to accomplish that purpose. The petitioner's claim that title to the assets involved herein passed to W. M. Petitifils. Inc., and that any profit arising out of the sale of these assets to Petitfils Confiserie represented income to W. M. Petitfils, Inc., is not supported by the evidence.

We have found that the petitioner offered to sell to W. M. Petitfils, Inc., all his assets, including the leasehold and the good will of the business located at 613-615 South Broadway and the merchandise and equipment used in the business, and this offer was accepted by the corporation, ">*1556 but no bill of sale or other instrument of conveyance appears to have been given by the petitioner to the corporation. The lease under which petitioner occupied the premises provided that it could be assigned only with the written assent of the lessor, and petitioner never procured the lessor's assent to assigning the lease to W. M. Petitfils, Inc. Petitioner had previously obtained the lessor's assent to assign the lease to Petitfils Confiserie, and was unwilling to pay any further sum for the lessor's assent to a transfer of the lease to W. M. Petitfils, Inc. Book entries were made recording the transfer of petitioner's assets to W. M. Petitfils, Inc., as of May 1, 1923. The corporation reported income from the operation of the restaurant and candy-manufacturing business from May 1, 1923, to June 17, 1923. The capital stock in the amount of $450,000 which the corporation agreed to issue to the petitioner was not issued until several months after the assets in question were transferred to Petitfils Confiserie.

Before the issuance of this stock petitioner had decided to combine his cafe and confectionery business with that of the Brown Candy Corporation and had obtained the">*1557 consent of W. M. Petitfils, Inc., to transfer to Petitfils Confiserie the assets used in the business which he had conducted as an individual at 613-615 South Broadway for ">*1096 $250,000 plus 3,150 shares of the capital stock of Petitfils Confiserie, it being agreed between petitioner and W. M. Petitfils, Inc., that he would execute and deliver a declaration of trust and hold the proceeds of the sale to Petitfils Confiserie for the benefit of W. M. Petitfils, Inc. We think that although petitioner had originally agreed to sell all his assets to W. M. Petitfils, Inc., the effect of the consent of this corporation to the transfer by the petitioner to Petitfils Confiserie of those assets used in the cafe and confectionery business was to substitute for such assets the amount which petitioner was to receive therefor from Petitfils Confiserie, namely, 3,150 shares of the capital stock of Petitfils Confiserie and its note for $250,000. The petitioner in his dealings with Petitfils Confiserie did not intimate that he had agreed to transfer his business to W. M. Petitfils, Inc., but, on the contrary, it appears that he represented himself to be the sole owner of the business, and">*1558 the assets in question were conveyed to Petitfils Confiserie by the petitioner and not by W. M. Petitifils, Inc. The sale to Petitfils Confiserie is not reflected in the income-tax return filed for 1923 by W. M. Petitfils, Inc. The execution by the petitioner of the declaration of trust quoted in our findings of fact is not sufficient to show that any profit derived from the transaction was income to W. M. Petitfils, Inc., instead of to the petitioner.

We do not need to consider the bona fides of the purported sale by the petitioner to W. M. Petitfils, Inc., because we have found that the agreement to sell was not consummated in accordance with the terms of petitioner's offer of May 8, 1923, but was expressly modified by the parties so as to except those assets which were used in petitioner's cafe and confectionery business.

We conclude that the profit resulting from the sale of the lease and business to Petitfils Confiserie represented income to the petitioner.

Judgment will be entered for the respondent.