Brooklyn & Richmond Ferry Co. v. Commissioner ( 1947 )

Brooklyn and Richmond Ferry Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent

Brooklyn & Richmond Ferry Co. v. Commissioner

Docket Nos. 11074, 11756

United States Tax Court

9 T.C. 865; 1947 U.S. Tax Ct. LEXIS 47;

October 30, 1947, Promulgated

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Decision will be entered under Rule 50.

Petitioner, a ferry company, and its sole stockholder contracted with another corporation for a "lease" of the management and control of its business, consisting mainly of a ferry franchise and terminals. The other corporation was to elect three out of four of petitioner's directors, the stockholder naming the other. The stock was put in escrow. As consideration, during most of the taxable period the stockholder received from the "lessee" sums not dependent upon petitioner's income. The lessee received dividends from petitioner, management fees, and charter hire for boats furnished by it. Held, the amounts received by the stockholder were properly included by the Commissioner in petitioner's income.

Robert J. Bird, Esq., and Francis E. Jasper, Esq., for the petitioner.

Scott A. Dahlquist, Esq., for the respondent.

Disney, Judge.

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DISNEY

These proceedings were consolidated for hearing and involve the following deficiencies and delinquency penalties for failure to file timely excess profits tax returns:

	1941	1942	1943
Income tax	$ 5,887.89	$ 2,906.65	$ 2,906.65
Declared value excess profits tax	621.81	395.71	396.01
Excess profits tax	8,244.45	17,354.87	17,358.65
Delinquency penalty	2,061.11	4,338.72	4,339.66

The issues are whether certain amounts paid directly to petitioner's sole stockholder by another corporation, pursuant to the terms of an agreement, constitute taxable income to petitioner, and whether the deficiencies in excess profits taxes are subject to 25 per cent penalties for failure to file timely returns. Stipulated facts are found as stipulated, and to the extent material, will be set forth with facts to be found from other evidence.

FINDINGS OF FACT.

The petitioner, a New York Corporation organized in 1913, filed tax returns for the taxable years with the collector for the second district of New York.

In 1933 the city of New York granted petitioner the exclusive right to operate ferry boats from Bay Ridge, Brooklyn, New York, to St. George, Staten Island, New York, for a term of 20 years, commencing March 31, 1934. The franchise was not assignable without the consent of the city of New York and was subject to cancellation for default by petitioner, including failure to operate ferries according to a prescribed schedule, and after 10 years without default, by petitioner. The franchise was the petitioner's most valuable asset. Petitioner could not have operated the ferry boat without the franchise. The franchise has not been conveyed, assigned, or canceled and is still in full force and effect.

During the entire year 1939 and at all times thereafter May G. Van Lockhorst, then May G. Schoonmaker, hereinafter referred to as the stockholder, owned all of the outstanding capital stock of petitioner, subject only to the rights of Electric Ferries, Inc., a New Jersey corporation, under the provisions of an agreement entered into on February 8, 1939, and amendments thereto. Electric Ferries, Inc., was engaged in operating ferries in other parts of New York City and renting its ferry boats under bare boat charters.

In 1938 the petitioner operated its service by use of ferry boats obtained under bare boat charters. It had a good location for a ferry business, but did not keep its equipment in proper condition and otherwise was not properly managed. About February 1, 1939, a Federal inspector prohibited further operation of the ferries until certain extensive repairs had been made to them. Petitioner could not comply with orders of the inspector because of lack of funds and the period of time allowed within which to put the boats in proper condition. Neither was petitioner able to purchase new ferries. The orders of the inspector were equivalent to condemnation of the boats. It was essential that petitioner make immediate arrangements for ferries to use in the operation of its line to avoid default under the franchise.

Immediately after the receipt of the inspector's orders on or about February 5, 1939, petitioner's manager communicated with the stockholder, who suggested that he communicate the information to her attorney, who had represented petitioner and her family. The stockholder's counsel first endeavored to have the orders of the inspector modified, failing in which he consulted Electric Ferries, Inc., first with respect to the sale of the stockholder's stock to it and then obtaining boats to operate the line. Electric Ferries, Inc., designated its secretary, an attorney, to represent it in the negotiations. A price was fixed by the stockholder for her stock, but Electric Ferries, Inc., refused to accept the offer. The stockholder's attorney then proposed a lease of the management and operation of the line but Electric Ferries, Inc., wanted a transfer of the stock to it, which the stockholder declined to do. Negotiations were then commenced to give Electric Ferries, Inc., the right to vote and control the stock, which resulted in the execution of an agreement on February 8, 1939, among the stockholder, Electric Ferries, Inc., petitioner, and the stockholder's attorney as escrow agent.

The agreement of February 8, 1939, provided, among other things, that:

First: * * * the Ferry Company and the said Stockholder [May G. Van Lockhorst] do hereby rent, lease and set over unto the Lessee [Electric Ferries, Inc.] and the Lessee does hereby accept, the management and control of the Ferry Company [petitioner] from the Stockholder for the full balance of the term of the said Franchise * * * and for any renewal or extension thereof, as hereinafter provided, and the Lessee agrees to pay to the said Stockholder as an operating expense of the business, ten (10%) percentum net, of the gross income from the operation of the said ferry line or business from whatever source derived, payable monthly * * *.

Second: The Ferry Company agrees to turn over the management and operation of the aforesaid Brooklyn-Staten Island ferry line to the Lessee on March 1, 1939 at 12:01 A. M., to operate under the existing franchise and leases from the City of New York, and any renewals or extensions thereof, for as long a period as said franchise and leases together with renewals or extensions thereof, may be obtained. It is understood, however, that the Lessee shall not be obligated to operate under any renewal or extension of the franchise from the City of New York, under the terms of which the present rate of five percent (5%) of the gross income is increased.

Third: The lessee agrees to cause the Ferry Company to fulfill and carry out all of the liabilities and obligations imposed upon the Ferry Company by said Franchise, and to provide the management for the aforesaid ferry line and the necessary modern up-to-date ferry boats and crews to operate the same during the term of this agreement, and to cause such operation to be carried out in accordance with the provisions of the existing franchise and leases. * * *

Fourth: The Stockholder agrees to put the Lessee in possession of the Ferry Company on March 1, 1939, by transferring the ownership of all of the capital stock of the Ferry Company to the Lessee by placing it in the name and possession of "Courtland Palmer as Escrow Agent," who agrees to hold the stock as herein provided and to act as Escrow Agent according to the terms of this agreement for the benefit of the parties hereto and as follows:

(a) The Stockholder agrees and warrants for the purpose of having the Lessee rely thereon that she is the sole owner of all of the issued and outstanding capital stock of the Ferry Company.

(b) The Stockholder or Escrow Agent agrees to obtain the resignation of each of the present directors and officers of the Ferry Company and to elect a board of four new directors of the Ferry Company on March 1st, 1939, three of whom shall be the nominees of the Lessee and one of whom shall be the nominee of the Stockholder, which nominee may be the Escrow Agent.

(c) The Lessee agrees, simultaneously with the election of its nominees as officers and directors of the Ferry Company, to deposit with the Escrow Agent the resignation of each of its said officers and directors, and to deposit similar resignations each year after the election of the Lessee's nominees as directors and officers of the Ferry Company, during the continuance of this agreement, to be used by the Escrow Agent only in the event of a breach of this agreement by the Lessee, or in event of default as herein set forth, or the termination thereof as herein provided. In the event of a breach or event of default or termination of this agreement, the Escrow Agent shall accept the resignations and elect a new board of directors all of whom shall be nominated by the Stockholder.

* * * *

(Certain things constituted events of default, including failure to pay the "rental" to the stockholder.)

Fifth: Upon the execution of this agreement the Lessee shall be entitled on March 1, 1939, 12:01 A. M., through its management of the Ferry Company to possession of the Franchise and rights of the Ferry Company, and by reason thereof shall be entitled to possession of all of the physical assets of the Ferry Company for the use and operation of the said Ferry Company and the said Franchise and all equipment and appliances appurtenant to the said business. The said Stockholder will take out of the said Corporation, as a dividend or otherwise, all of its current assets, including cash received up to midnight on February 28th, 1939, accounts receivable and securities. The Stockholder hereby agrees to pay all of the liabilities of the said Ferry Company incurred up to and including February 28, 1939, and agrees to indemnify and save harmless the Lessee (or the Ferry Company) of and from any and all of the said liabilities, damages, or charges resulting from the operation of the said ferry up to midnight of February 28, 1939, and also will indemnify and reimburse the Lessee (or the Ferry Company) for any Federal income taxes which may be assessed against it by reason of profits resulting from any sales of the property or the removal of the assets by the Stockholder, or from operations up to February 28, 1939.

* * * *

Seventh: Payment of taxes and operating expenses: The Lessee shall cause the Ferry Company to pay all taxes, on the Ferry Company and on its income, and all expenses for the operation of the business and ferry, including the five (5%) percentum, payable to the City of New York for the Franchise to operate said ferry.

The Lessee agrees to cause the Ferry Company to pay and discharge monthly not later than the 10th of each month, all obligations against the Ferry Company for the preceding month, and not to permit any obligations to accrue and be over forty days old; excepting only maintenance charges and such claims or debts that are disputed or litigated in good faith. The Lessee hereby agrees to indemnify and save harmless the Ferry Company against any and all claims, liabilities and debts incurred by the Ferry Company during the period of this lease, or arising out of the breach thereof. Upon the expiration of this agreement the Lessee agrees that the Ferry Company shall be free and clear of all liabilities and claims and shall have possession of all physical assets owned as of March 1st, 1939 in good order and condition, usual wear and tear excepted, and except such assets as have been used up or expended.

* * * *

(The lessee would not operate a line from Brooklyn to Staten Island in competition with petitioner.)

Ninth: Moneys collected: The Lessee shall cause the Ferry Company to collect ferry tolls daily from the operation of the said ferry, which moneys shall be deposited into a bank account under the name of Brooklyn and Richmond Ferry Company. No officers salaries or dividends or charter hire payable to the Lessee, or any other expense not incurred in the operation of said ferry business, shall be paid by the Ferry Company from the moneys so deposited until after the monthly payment due to the Stockholder under paragraph "First" hereof shall have been made.

* * * *

Eleventh: Payment of old obligations of Ferry Company: The stockholder hereby assumes the payment of all obligations of the Ferry Company now existing or to be incurred prior to March 1, 1939, including notes and debts due by the Ferry Company and by the Carteret Ferry Corporation, and agrees to use the moneys received under the provisions hereof for the purpose of liquidating said obligations.

* * * *

The agreement was subject to cancellation by the lessee after one year by giving one year's written notice to the stockholder and the escrow agent, and provided that it was entered into "for the mutual benefit of each of them," and that, as to all matters within the provisions of the contract, "each of the parties will use its best efforts to assist the others in the successful promotion of and the maintenance of business of the ferry line and of the franchises herein referred to."

Sixteenth: The Escrow Agent: During the term of this agreement all dividend checks received by the Escrow Agent shall be endorsed over to the Lessee, as the owner of the stock held in the name of the Escrow Agent. * * *

* * * *

The parties agree that the sum of at least Two Thousand Dollars ($ 2,000) should be immediately expended on the repair or maintenance of terminal facilities and Ferry Company and the Stockholder agrees to allow the Lessee an amount up to Two Thousand Dollars ($ 2,000) actually expended by Lessee, such allowance to be made upon a verified statement showing the expenditure of such amount by Lessee on or before April 15th, 1939. The Lessee shall be entitled to cause the Ferry Company to withhold out of payments to be made to the Stockholder hereunder, an amount not to exceed Five Hundred Dollars ($ 500) per month until such allowance has been fully liquidated.

The agreement also provided that upon his resignation the escrow agent should deliver stock certificates, books, or other property held by him, in accordance with written instructions of the stockholder, petitioner, and Electric Ferries, Inc. Another provision gave the stockholder the right to inspect petitioner's books and receive monthly and annual reports of its accounts.

In a supplemental agreement entered into on May 15, 1939, the petitioner agreed to spend not less than $ 22,000 not later than October 30, 1939, for repairs and improvements to its terminal facilities, and paragraph "First" was modified so as to make the first monthly payment to the stockholder begin on June 10, 1939.

By the provisions of an agreement executed on November 10, 1939, paragraph "First" of the agreement of February 8, 1939, was amended so as to provide for the payment by the lessee to the stockholder of an "annual rental" in the amount of $ 24,000 and in addition, effective November 1, 1939, a sum representing 10 per cent of annual gross income of petitioner in excess of $ 400,000, the provision in the original agreement to charge the amounts "as an operating expense of the business" being eliminated; and paragraph "Twelfth" was amended to give the lessee the right to cancel the agreement at any time after five years from November 1, 1939, by giving one year's written notice thereof and a further right of cancellation on six months notice if a bridge or tunnel was constructed connecting Brooklyn and Staten Island.

On December 1, 1941, the "annual rental" was increased to $ 34,000 in consideration of the construction by petitioner of an additional slip at the Brooklyn terminal.

On February 28, 1939, the escrow agent, by voting the stock, elected a new board of directors of petitioner consisting of four members, three of whom were selected by Electric Ferries, Inc., and the other was himself. The board then selected the nominees of Electric Ferries, Inc., officers of petitioner. The officers elected, president, vice president and secretary and treasurer, respectively, held like offices with Electric Ferries, Inc. These officers managed and operated the business of petitioner.

Thereafter and during the taxable years petitioner chartered ferries from Electric Ferries, Inc., on a bare boat basis, and continued to operate under its franchise, employ its own crews, and pay its operating expenses, including the cost of repairs to terminals. At undisclosed times petitioner declared dividends and paid them by check to the escrow agent, who endorsed the checks to Electric Ferries, Inc.

During the years 1939 to 1943, inclusive, the stockholder was paid directly by Electric Ferries, Inc., pursuant to the terms of the agreement of February 8, 1939, and amendments thereto, the amounts of $ 18,516.98, $ 24,000, $ 37,222.76, $ 34,000, and $ 34,000, respectively. Electric Ferries, Inc., deducted the amounts as operating expenses for Federal tax purposes and the stockholder included them in her income tax returns for the respective years and paid taxes thereon. The amounts were not reported as income in returns filed by the petitioner. The returns of the petitioner for the years 1936 to 1939, inclusive, were accepted as filed.

The stockholder did not own stock of Electric Ferries, Inc. The books of petitioner do not reflect any personal transactions by the stockholder. The tax consequences of the agreement of February 8, 1939, to the stockholder were not discussed or considered by the counsel who negotiated the contract.

The income tax returns filed by the petitioner for 1941, 1942, and 1943 reported gross income and net losses as follows:

	Gross income	Net loss
1941	$ 545,455.06	$ 20,954.30
1942	584,229.53	7,873.51
1943	502,301.30	7,911.02

The petitioner deducted as an operating cost for charter hire of boats from Electric Ferries, Inc., and as management fees, the following amounts:

		Management
	Charter hire	fees
1941	$ 197,625.88	$ 27,268.01
1942	199,219.30	27,388.96
1943	170,300.94	28,568.48

No deductions were taken for compensation of officers.

The amounts paid to the stockholder by Electric Ferries, Inc., in the taxable years were included in the income of petitioner by the respondent as income taxable under the provisions of section 22 (a) of the Internal Revenue Code. He found that petitioner sustained no deductible operating loss in 1941 because of petitioner's failure to report the amounts paid by Electric Ferries, Inc., to the stockholder in 1939 and 1940.

The tax returns of petitioner were prepared by a firm of accountants. The manager of the tax department of the firm, who was qualified to advise clients on tax questions, was requested by petitioner to consider the necessity of filing an excess profits tax return for 1940. At his request petitioner asked the collector for an extension of time within which to file an excess profits tax return. The manager studied the Commissioner's regulations and court decisions and concluded therefrom that, since petitioner sustained a loss and the payments made by Electric Ferries, Inc., to the stockholder did not constitute income taxable to petitioner, it was not necessary to file an excess profits tax return, and so advised petitioner. He did not consider the franchise in connection with the question. The petitioner accepted and relied upon the advice and advised the collector in writing that, as it had sustained a loss, there was no need to file an excess profits tax return. The manager reviewed the question in connection with the preparation of Federal tax returns for 1941, 1942, and 1943 and reached a like conclusion with regard to the necessity of filing excess profits tax returns. Petitioner depended upon the manager to prepare necessary tax returns. Excess profits tax returns for 1941, 1942, and 1943 were filed by the petitioner on or about January 26, 1945. In his determination of the deficiencies in excess profits taxes, the respondent imposed a 25 per cent penalty each year for petitioner's delinquency in failing to file timely excess profits tax returns on Form 1121. Petitioner's failure to file the returns was due to reasonable cause and was not due to wilful neglect.

OPINION.

The substance of petitioner's argument upon brief is that the amounts in controversy represent consideration paid by Electric Ferries, Inc., to its sole stockholder for the right to vote her stock and thus be in a position to control and manage petitioner's affairs; and that therefore they are not taxable to the petitioner. Respondent, upon brief, first contends that, as the payments were first received by petitioner in the form of tolls collected in conducting its ferry business, the amounts constitute income of petitioner; also that, though it is contended that the amounts were not rental, if they were rental they could only be rental for the use of the petitioner's assets, thus income to the petitioner, though paid directly to the stockholder.

The original agreement of February 8, 1939, provided in paragraph "First" for the payment by Electric Ferries, Inc., to the stockholder "as an operating expense of the business," 10 per cent net, of the gross income of petitioner, payable monthly. The words in quotation marks were eliminated in the amendment made on November 10, 1939, and did not appear in the contract at any time thereafter. The amounts in question were paid by Electric Ferries, Inc., not by the petitioner, and were claimed as operating expense deductions in income tax returns filed by the former. Paragraph "Ninth" of the agreement does not, as respondent contends, clearly make the obligation payable out of ferry tolls collected by petitioner. The transaction contemplated that petitioner would charter one or more ferries from Electric Ferries, Inc., on a bare boat basis. The paragraph in question provides for the deposit of receipts from tolls in a bank account under petitioner's name and that no money should be disbursed therefrom by petitioner to pay officers' salaries, dividends, charter hire to Electric Ferries, Inc., or nonoperating expenses, until after the stockholder was paid her monthly payment, covering gross income for the preceding month, as provided for in paragraph "First."

In paragraph "Sixteenth" it is agreed that the ferry company and the stockholder shall allow the lessee up to $ 2,000 to be expended on repair and maintenance of terminal facilities, and "The Lessee shall be entitled to cause the Ferry Company to withhold out of payments to be made to the Stockholder hereunder, an amount not to exceed Five Hundred Dollars ($ 500) per month until such allowance has been fully liquidated." These provisions of the original agreement leave it doubtful as to whether the payments to the stockholder were dependent upon the income of petitioner. However, on May 15, 1939, the original agreement was modified, by agreement of all parties, the quoted provision as to $ 2,000 was stricken, Electric Ferries, Inc., paid $ 200 and advanced $ 1,500 under paragraph "First" of the original agreement, and that paragraph was modified, as to the 10 per cent to the stockholder, to read, "ten percentum net from the gross income from the operation of the said ferry line or business from whatever source derived, payable monthly on the 10th day of each month beginning June 10, 1939, covering the gross income from the preceding calendar month." It is to be noted that, as modified, the payment of 10 per cent was to be from the income of the ferry line. Still later, on November 10, 1939, the language just above quoted from paragraph "First" of the original agreement was, by agreement of the parties stricken, being substituted by an agreement of the lessee to pay to the stockholder "annual rental" of $ 24,000, provided that if gross income exceeds $ 400,000, the lessee will pay the stockholder "an additional sum representing ten per cent (10%) of all such gross income in excess of Four Hundred Thousand Dollars ($ 400,000.00)." Paragraph "Twelfth" was also amended to provide, in part, that if the ferry company, because of reduction of rates by New York City on a certain other ferry, "is unable to meet its expenses of operation including reasonable charter hire, the stockholder agrees to discuss with the Lessee an adjustment and revision of the guaranteed annual rental of * * * $ 24,000." Again, on December 1, 1941, the agreement was modified, as to paragraph "First," to state, inter alia, that the ferry company and stockholder rent, lease, and set over to the lessee, and the lessee accepts the management and control of the ferry company from the stockholder and the lessee agrees to pay to the stockholder annual rental of $ 34,000. Thus it is seen that during 1942 and 1943, two of the taxable years here at hand, and for the last two months of 1941, the stockholder received a flat rental of $ 34,000, while for 1940 and 1941 (up to November 1, 1941), she received from the lessee a flat rental of $ 24,000 plus $ 13,222.76, "representing ten percent (10%) of all such gross income" above $ 400,000, while in 1939 (prior to the amendment of November 10, 1939) she received from the lessee "ten percentum net from the gross income" of the ferry line. We therefore regard as not important the provisions effective prior to the taxable years, and do not base our conclusion thereon. During the entire period, however, both the ferry company and the stockholder were in form renting and leasing the "management and control" of the ferry company, and under the original agreement, not modified in this respect, the lessee was entitled, through its management of the ferry company "to possession of the Franchise and rights of the Ferry Company, and by reason thereof shall be entitled to possession of all of the physical assets of the Ferry Company for the use and operation of the said Ferry Company and the said Franchise and all equipment and appliances appurtenant to the said business." Paragraph "Seventh" provided for the return to the ferry company, upon termination of the agreement, of "possession of all physical assets owned as of March 1st, 1939 in good order and condition, usual wear and tear excepted."

Upon consideration of these instruments, we conclude that throughout all years covered by the agreement there was a contract of the general nature of a lease to Electric Ferries, Inc., by the petitioner, of the management and control of petitioner, even though after the amendment of November 10, 1939 (effective November 1, 1939), the payments were not to be a percentage "from" the gross income of the ferry company, but an "annual rental" (together with 10 per cent, "representing" 10 per cent of gross income above $ 400,000, until the amendment of December 1, 1941, effective November 1, 1941). The agreement made could not have been made by the stockholder alone. It was, and continued to be, that of the corporate petitioner, as the owner of the physical assets, the management and control, and possession of which was delivered to the "lessee." Neither contracts nor amendments provide at any point for the transfer of the right to vote the stockholder's stock, emphasized by the petitioner as the crux of its argument, except as follows: It is provided that the stockholder transfer the ownership of the capital stock to the lessee by placing it in the hands of an escrow agent, but he merely acted "according to the terms of this agreement for the benefit of the parties hereto," and it was agreed that he, or the stockholder, would elect a board of four directors, three to be nominees of the lessee and one the nominee of the stockholder. Nowhere in the agreement can we find language setting forth the mere transfer of power to vote stock which the petitioner seeks, in effect, to segregate from the rights and powers and property of the corporation. The agreement was "for the mutual benefit of each of them," and each agreed to assist in the operation of the ferry line, and in maintenance of the franchise and the successful promotion of the business. The ferry company, stockholder, and lessee alike were to instruct the escrow agent as to delivery of stock certificates, books, or other property held by him at his resignation. He was to hold the stock for the benefit of the parties. The stockholder had a right to receive monthly reports and to inspect the ferry company's books. All of these elements of agreement prove clearly, we think, that there was no simple sale of right to vote stock, as argued by the petitioner. Although, as to the taxable years, we do not regard the payments to the stockholder as being directly from the petitioner, and although there was not a lease of property in the fullest sense by the corporation, there was a contractual arrangement between petitioner and "lessee," as well as stockholder, so similar in nature to a lease as to be called so by the parties. The petitioner's idea that the payments related only to a grant of right to vote stock is altogether too narrow, in view of all the facts here involved.

It is well settled that a taxpayer may be charged with the receipt of taxable income paid directly to another pursuant to an arrangement previously entered into. Lucas v. Earl, 287 U.S. 111">287 U.S. 111; United States v. Joliet & C. R. Co., 315 U.S. 44">315 U.S. 44.

In the Joliet case, supra, the taxpayer leased its railroad property in perpetuity on terms requiring the lessee to pay to the lessor's stockholders an annual dividend of 7 per cent of the par value of the shares, without any deduction for Federal tax, and to pay any taxes due the United States on account of the dividends so paid. The Court held that the lessor realized income in the amount of the dividends paid by the lessee to its stockholders. We think the situation here is in principle the same. There was a contract in the nature of lease by the petitioner, an essential part of the agreement by all parties.

The substance of the agreement is that for a consideration payable, without regard to the amount of petitioner's income, to petitioner's stockholder (during most of the taxable periods here involved) Electric Ferries, Inc., agreed to manage petitioner's affairs. Dividends in amounts not disclosed by the record were paid to Electric Ferries, Inc., but they were not referred to in the income tax returns filed by petitioner for the taxable years. In addition, Electric Ferries, Inc., received about $ 27,000 each year as management fees and large amounts for charter hire of its boats.

The petitioner owned valuable assets over which its control was absolute. The franchise, its most valuable asset, was unassignable and the rights conferred upon Electric Ferries, Inc., could not have been given without continued operation by petitioner. Petitioner for a consideration payable directly to its sole stockholder, and with her concurrence, gave certain rights to Electric Ferries, Inc. These rights enabled Electric Ferries, Inc., to fix the charter rate of ferries chartered to petitioner and to obtain management fees and dividends. The vice president of Electric Ferries, Inc., regarded these rights as having great value to Electric Ferries, Inc. The arrangement was thus one of contemplated profit to Electric Ferries, Inc., and it assured the stockholder of a return on her investment in stock of petitioner. It is apparent that without such considerations the agreement would not have been entered into.

Here, as in the Joliet case, the stockholder received the payments as the direct result of her status as an owner of petitioner's stock. Without the stock and the right it conferred to dividends out of profits, she could not have entered into the arrangement. Her right to receive the moneys here involved were "derivative in origin," in the words of the Joliet case. The fact that the payments were made by Electric Ferries, Inc., out of its own funds is not helpful to petitioner. The dividend was paid by the lessee in the Joliet case, and was payable irrespective of financial results of the operation of the lessor's property. Here, petitioner agreed to the arrangement, and consented to the use of its property under new management for a money consideration payable to its sole stockholder, the only person entitled to its net earnings, and net assets upon dissolution. This was an exercise by petitioner of power to dispose of income and amounted to the realization of the income by it. Regulations 74, article 70 (now Regulations 103, section 19.22 (a)-20; and Regulations 111, section 29.22 (a)-19), discussed in the Joliet case, is pertinent here. Of it the Court said:

That long standing regulation is plainly applicable here. It covers various kinds of conveyances and leases including those where the grantor or lessor has parted with all rights of management and control over property. * * *

In our opinion, this is one of such cases. See also Helvering v. Horst, 311 U.S. 112">311 U.S. 112.We think the rationale of the Joliet and Horst cases applies and, accordingly, sustains the action of the respondent in including the amounts in question in gross income of petitioner.

The petitioner filed income and declared value excess profits tax returns on Form 1120, but, on advice of the manager of the tax department of the accounting firm which was engaged to prepare its returns that the payments made by Electric Ferries, Inc., to the stockholder did not constitute taxable income to petitioner and that, without such income included, losses were sustained each year, timely excess profits tax returns were not filed by petitioner.

The facts show that petitioner acted in good faith and that the accountant entrusted with determining whether the filing of the returns was necessary considered the subject in the light of the Commissioner's regulations and court decisions. The accountant's qualifications to advise petitioner were conceded by the respondent at the hearing. The mere fact that, according to the conclusion reached by us in this proceeding he did not reach the correct result, is not fatal to petitioner. The facts here distinguish the case from A. G. Fides, 47 B. T. A. 280; affd., 137 Fed. (2d) 731; and P. Dougherty Co., 5 T.C. 791">5 T. C. 791; affd., 159 Fed. (2d) 269, relied upon by the respondent. Reasonable cause is present here for failure to file the returns on time. See C. R. Lindback Foundation, 4 T. C. 652; affd., 150 Fed. (2d) 986; Safety Tube Corporation, 8 T. C. 757; Hatfried, Inc. v. Commissioner, 162 Fed. (2d) 628. On this issue we hold for the petitioner.

Decision will be entered under Rule 50.