Consolidated Cos. v. Commissioner , 15 B.T.A. 645 ( 1929 )

CONSOLIDATED COMPANIES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

IBERVILLE WHOLESALE GROCERY CO., LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Consolidated Cos. v. Commissioner

Docket Nos. 14079, 14080.

United States Board of Tax Appeals

15 B.T.A. 645; 1929 BTA LEXIS 2809;

February 28, 1929, Promulgated

---

1. Amounts claimed as deductions from income for 1918, held not to be deductible in said year either as bad debts or losses, since the transactions giving rise thereto were not completed in said year.

2. Special assessment denied.

3. JURISDICTION. - All facts necessary to show jurisdiction in the Board must be pleaded and proved. Where a petition is filed in the name of the taxpayer, a corporation which has been dissolved by cancellation of its charter, and where it is not alleged and does not affirmatively appear that the person filing the petition has lawful authority to act for and in behalf of such dissolved corporation, the proceeding will be dismissed for lack of jurisdiction.

G. S. Ruhl, C.P.A., for the petitioners.

F. R. Shearer, Esq., for the respondent.

---

TRAMMELL

These are proceedings for the redetermination of deficiencies in income and profits taxes as follows:

In the case of the Iberville Wholesale Grocery Co., Ltd., Docket No. 14080, deficiency for the six-month period ended June 30, 1918, in the amount of $15,429.06.

In the case of the Consolidated Companies, Inc., Docket No. 14079, deficiency for the six-month period ended December 31, 1918, in the amount of $5,143.19.

The proceedings were consolidated for hearing and decision.

The issues raised by the pleadings in the case of the Iberville Wholesale Grocery Co., Ltd., under Docket No. 14080, will not be referred to or considered herein, for the reason that the facts necessary to show jurisdiction in the Board have neither been alleged nor proved. The jurisdictional facts not having been established, said proceeding will be dismissed.

The issues raised by the pleadings in the case of the Consolidated Companies, Inc., under Docket No. 14079, are:

(1) Whether the respondent erred in holding that the petitioner did not come within the purview of section 327(d) of the Revenue Act of 1918, and was, therefore, not entitled to have its profits tax computed under the provisions of section 328 of said Act, for the six-month period ended December 31, 1918; and (2) whether the respondent erred in disallowing the amount of $11,396.09 claimed by the petitioner as a deduction from income on account of the expense of operating a moving picture theater in 1918.

FINDINGS OF FACT.

The Iberville Wholesale Grocery Co., Ltd., was a corporation organized under the laws of the State of Louisiana in February, 1905, for the purpose of conducting a general wholesale grocery business, with principal office at Plaquemine.

In July, 1916, the charter of said corporation was amended to increase its authorized capital stock from $25,000 to $200,000, and to enlarge the scope of its corporate purposes and powers. The corporation operated under its amended charter from July 1, 1916, to June 30, 1918, when it ceased doing business and transferred its assets to the Consolidated Companies, Inc., a successor corporation.

In 1916, when the charter of the Iberville Wholesale Grocery Co. was amended, the transaction was treated by the corporate officers as if a new corporation had been organized. For convenience of designation, the business prior to that date was referred to as the Old Iberville Wholesale Grocery Co., and subsequent to that date as the New Iberville Wholesale Grocery Co.

On or about July 1, 1916, a meeting of the board of directors was held, and the board appointed V. J. Kurzweg as liquidator to settle and liquidate the affairs of the so-called Old Iberville Wholesale Grocery Co., and to distribute certain assets to the stockholders, including particularly the proceeds from the collection of accounts.

The meeting of the board of directors of the so-called old company was followed immediately by a meeting of the stockholders of the so-called new company, the company, however, being in each instance the same corporation. At this stockholders' meeting, a committee was appointed to fix the valuations of the stock of merchandise, equipment and buildings to be transferred from the books of the old to the books of the new company.

The so-called new company did not take over any of the accounts receivable and did not assume any of the accounts payable of the old company.

Kurzweg, acting in the capacity of a liquidator, collected the accounts receivable of the old company, paid its obligations, and distributed the balance to the stockholders. The liquidation of the retained assets of the old company has not yet been fully completed.

The original petition under Docket No. 14080 was filed in the name of the said Iberville Wholesale Grocery Co., as petitioner, on April 23, 1926, and was verified by an affidavit reading in part as follows:

Before me, the undersigned authority, personally came and appeared V. J. Kurzweg, who being duly sworn, deposes and says that he is Secretary and Treasurer of the Consolidated Companies, Inc., and was Secretary and Treasurer of the Iberville Wholesale Grocery Company which was merged into the said Consolidated Companies; * * *.

An amended petition was filed on March 1, 1927, in the name of "Iberville Wholesale Grocery Company, Ltd., Petitioner," paragraph 1 of which reads as follows: "1. The petitioner was a Louisiana Corporation with principal office at Plaquemine, Louisiana." And said amended petition was verified by affidavit reading in material part as follows:

V. J. Kurzweg, being duly sworn says that he is the liquidator and was formerly Secretary and Treasurer of the Iberville Wholesale Grocery Company, Ltd., the petitioner herein; * * *.

Some time prior to October 4, 1927, and subsequent to the organization of the Consolidated Companies, Inc., the charter of the Iberville Wholesale Grocery Co., Ltd., was canceled.

The petitioner, Consolidated Companies, Inc., is a Louisiana corporation, with principal office at Plaquemine. It was organized as of July 1, 1918 and took over the business and assets of the Iberville Wholesale Grocery Co. and of the St Mary Wholesale Grocery Co.

In 1918 a corporation was organized for the purpose of operating a moving picture theatre, known as the Liberty Theatre, at Plaquemine, La. It was operated from April until October, 1918. The members of the Wilbert family were the principal stockholders of the W. J. Hebert Co., a competitor of the Consolidated Companies, Inc., in the wholesale grocery business. Prior to the organization of the Liberty Theatre, the Wilberts owned the only theatre in Plaquemine. The stockholders of the Consolidated Companies, Inc., instigated and brought about the organization of the Liberty Theatre for the purpose of fighting its competitor, forcing it out of the wholesale grocery business, and thus eliminating undesirable competition.

In October, 1918, the Liberty Theatre and the Wilbert Theatre were closed at the request of the Board of Health on account of an epidemic. Immediately thereafter, negotiations were commenced with a view to arbitrating the differences between the principal competitors. In December, 1918, an agreement was reached whereby the operation of the Liberty Theatre was discontinued in consideration of the discontinuance of the wholesale grocery business by the petitioner's competitor.

The Liberty Theatre corporation had an authorized capital stock of $40,000 or $50,000, of which approximately $30,000 was paid in. The outstanding stock was owned by about 40 stockholders, including the petitioner corporation and some of its stockholders. The petitioner owned $5,000 or $10,000 of the Liberty Theatre stock.

Some time subsequent to the date on which the agreement was reached to discontinue the Liberty Theatre, the assets of the theatre corporation were sold and the proceeds used to liquidate at par the stock owned by the minority stockholders, or stockholders other than the Consolidated Companies, Inc., and its stockholders. From $5,000 to $8,000 was so paid to the minority stockholders. All creditors of the Liberty Theatre were paid in full, except the petitioner corporation and the Schwing Lumber & Shingle Co. After the minority stockholders were paid, the balance of the proceeds from the sale of the theatre assets was applied on the company's open accounts.

The tax return of the Consolidated Companies, Inc., for the six-month period ended December 31, 1918, showed in Schedule A-17, the following items:

Accounts Charged Off
10/30 Liberty Theatre loss	$3,654.96
12/23 Liberty Theatre loss	3,542.55
Total	$7,197.51

Said total amount was claimed on the return as a deduction from income for 1918.

In 1919 the petitioner charged off $4,198.58 to the same account, which amount was claimed as a deduction from income for 1919.

The Liberty Theatre was never operated by the Consolidated Companies, Inc. It was run by a separate corporation organized for that purpose. The petitioner advanced money, merchandise, material and equipment to the theatre corporation, which items were charged on open account. The "losses" charged off by the petitioner, and for which deductions were taken in its returns for 1918 and 1919, in the total amount of $11,396.09, consisted of the balance of said open account, amounts refunded to minority stockholders, and the loss sustained by the petitioner on the stock of the theatre corporation. Said deductions were disallowed by the respondent.

When the Consolidated Companies, Inc., was organized, a considerable amount of its stock was distributed among and sold to merchants in its territory, who would be prospective customers. To a large extent, these new stockholders thereafter gave the petitioner the preference on their business by purchasing merchandise from it when the prices were not greater than could be obtained elsewhere. These stockholders also rendered varying services to the petitioner, without compensation, principally in the way of conferring informally with its officers and directors concerning matters of credit, and soliciting business.

The Iberville Wholesale Grocery Co., one of the predecessor corporations, about 1913 began using a trade-mark called the "Red Ball" to identify its highest quality goods. This trade-mark was consistently used from and after 1913. At the time of the organization of the petitioner corporation in 1918 it acquired at the then market values the stocks of merchandise and accounts of its two predecessors, and the value of the trade-mark and good will was not taken into consideration.

During the period ended December 31, 1918, the petitioner's volume of sales was approximately $1,500,000. At the end of that period it had borrowed money in the amount of $233,813.44, and the amount of its outstanding capital stock was $613,700. During this period, the petitioner paid the following salaries to its officers:

Officer	Duties	Time	Shares	Salary
H. N. Sherburne, president	Credit man	Half	1,760	$1,950
P. H. Kurzweg, vice president	Branch manager	Entire	1,000	2,850
V. J. Kurzweg, secretary and treasurer	General manager	Entire	1,525	3,520
Total				$8,320

OPINION.

TRAMMELL: In Docket No. 14080, the original petition was filed on April 23, 1926, in the name of Iberville Wholesale Grocery Co., Ltd., as petitioner. It is alleged in paragraph 1 of this pleading that "The taxpayer was a Louisiana corporation with principal office at Plaquemine, Louisiana." The petition was verified by an affidavit reading in part as follows:

Before me, the undersigned authority, personally came and appeared V. J. Kurzweg, who being duly sworn, deposes and says that he is Secretary and Treasurer of the Consolidated Companies, Inc., and was Secretary and Treasurer of the Iberville Wholesale Grocery Company which was merged into the said Consolidated Companies; * * *.

On March 1, 1927, an amended petition was filed in the name of the "Iberville Wholesale Grocery Company, Ltd., Petitioner," in which it is alleged that the petitioner "was" a Louisiana corporation, and said amended petition was verified by affidavit reading in part as follows:

V. J. Kurzweg, being duly sworn says that he is the liquidator and was formerly Secretary and Treasurer of the Iberville Wholesale Grocery Company, Ltd., the petitioner herein; * * *.

The Iberville Wholesale Grocery Co., Ltd., ceased to do business on or about July 1, 1918, when it transferred its business and assets to the successor corporation, Consolidated Companies, Inc. Some time thereafter and prior to October 4, 1927, the charter of the said corporation was canceled, and the corporation thereby dissolved. V. J. Kurzweg, the secretary and treasurer of the corporation, and who was acting as its general manager, testified by deposition signed and sworn to on October 4, 1927, as follows:

Q. Exhibit "D," which is the original charter of the Iberville Wholesale Grocery Company, has never been cancelled, has it Mr. Kurzweg?

A. I think it has. Q. Do you know when? A. Recently, within the last year. Q. Since the organization of the Consolidated Companies?

A. Yes, sir.

In , Mr. Chief Justice Taft, speaking for the court, said:

It is well settled that at common law and in the federal jurisdiction a corporation which has been dissolved is as if it did not exist, and the result of the dissolution can not be distinguished from the death of a natural person in its effect (citing authorities). It follows therefore that, as the death of the natural person abates all pending litigation to which such a person is a party, dissolution of a corporation at common law, abates all litigation in which the corporation is appearing either as plaintiff or defendant. To allow actions to continue would be to continue the existence of the corporation pro hac vice. But corporations exist for specific purposes, and only by legislative act, so that if the life of the corporation is to continue even only for litigating purposes, it is necessary that there should be some statutory authority for the prolongation.

In the recent case of , we held that a petition filed for and on behalf of a wholly dissolved corporation does not give this Board jurisdiction. See also . In the latter case, a California corporation had forfeited its charter in 1917, and under the California law its affairs thereafter were in the hands of the former directors as trustees. The Commissioner determined a deficiency against the corporation, and the former stockholder, by one of their number, filed a petition with the Board. We held that since the stockholders were not the person against whom the deficiency had been determined and had no authority to represent such person, the Board was without jurisdiction.

In the instant case it appears that the corporation in whose name the original and amended petitions were filed has heretofore been dissolved by cancellation of its charter. The exact date of the dissolution is not disclosed. Whether the dissolution occurred prior or subsequent to the filing of the petitions, the Board is now without jurisdiction, under the above cited decisions, to redetermine the deficiency asserted by the respondent against the corporation, unless there is authority under the Louisiana statutes for the prolongation of the life of the corporation for litigating purposes, and unless it further appears that this proceeding has been brought in accordance with such statutory authority.

Act 267 of 1914, appearing in the "Constitution and Statutes - Louisiana - Soloman Wolff, 1920," vol. 1, p. 305, under section 30, provides as follows:

* * *

All corporations, whether they expire by limitation or are otherwise dissolved, shall be continued as bodies corporate for the purpose of prosecuting and defending suits by or against them, and of enabling them to liquidate their affairs, to dispose of and convey their property and to divide their capital, but not for the purpose of continuing the business for which they were established.

(a) Upon the dissolution in any manner of any corporation the stockholders shall elect from among their number one or more liquidators * * *.

(b) The liquidators shall have authority to sue for and recover debts and property in the name of the corporation, and may be sued by the same name, and citation may be served upon any one of them, and they shall be liable in solido to any creditor or stockholder for the moneys and property of the corporation which shall come to their hands or possession as such liquidators, and for the proper application and distribution thereof.

(c) Where any corporation shall be dissolved in any manner whatever, any court of competent jurisdiction may, at any time, on application of any creditor, or stockholder, and for good reason shown, order that the liquidators so appointed by the stockholders, shall qualify as judicial liquidators, and liquidate the affairs of said corporation under the orders and decrees of the court, * * *.

While it thus appears that under the Louisiana statutes a dissolved corporation is continued as a body corporate for certain purposes, including that of prosecuting and defending suits, there is no provision for such action except by or through the liquidators appointed in accordance with the terms of the statute.

In an action brought in a court of limited jurisdiction, it is generally the rule that all facts necessary to show the jurisdiction of the court must be pleaded and proved. 31 Cyc. 57-104. The jurisdiction of this Board is prescribed and limited by statute, and all essential jurisdictional facts must therefore affirmatively appear.

The Revenue Act of 1926 provides, in section 274, that if in the case of any taxpayer the Commissioner determines that there is a deficiency, the Commissioner is authorized to send notice of such deficiency to the taxpayer by registered mail, and within 60 days after such notice is mailed the taxpayer may file a petition with the Board of Tax Appeals for a redetermination of the deficiency, and the Board shall have jurisdiction to redetermine the correct amount of the deficiency.

From these provisions it is clear, we think, that the jurisdiction of the Board depends directly upon the filing of the petition for redetermination by the taxpayer against whom the Commissioner has determined the deficiency. Unless the petition is filed by such taxpayer, or by some person lawfully authorized to act in behalf of the taxpayer, the Board is without jurisdiction. In , we said:

Since, therefore, the petitioner here is not proceeding for a redetermination of a deficiency against him, and since the taxpayer against whom a deficiency has been determined has not filed the petition, there is nothing within the statutory jurisdiction of the Board, and, for that reason, the proceeding will be dismissed.

In the absence of proper pleading and proof of the essential facts, the Board is without means to determine whether or not it has jurisdiction in the premises. It is primarily to meet this situation that our rules of practice prescribe, in Rule 5(b), that a proceeding shall be instituted by filing with the Board a petition, which shall contain, among other things, "Proper allegations showing jurisdiction in the Board."

In the case at bar, the foregoing rule has not bee complied with. It is not alleged nor proved that the petitioner is a presently existing corporation, nor that a once existant corporation had been dissolved and that the person who filed the petition in its name is the duly appointed, qualified and acting liquidator, or is otherwise authorized to act for such corporation.

There is some evidence in the record that Kurzweg, who verified the petitions, was appointed by the directors of the so-called Old Iberville Wholesale Grocery Co. in July, 1916, to act as liquidator in collecting its accounts receivable and distributing the proceeds among its stockholders. However, that action can not in any sense be said to confer authority or color of authority on him to file the petition in this proceeding, for the reason that he was not appointed by the stockholders to act as liquidator upon final dissolution of the corporation subsequent to 1918, as provided in the statute. He was appointed by the directors, and not the stockholders, long prior to dissolution of the corporation, and at a time when the appointment of a liquidator was not authorized by law. Furthermore, his authority was confined to liquidating the affairs of the corporation as they existed at July 1, 1916, and the collection and distribution of certain assets owned by the corporation at that date.

Since we are unable to say from the record before us that we have jurisdiction to redetermine the deficiency asserted by the respondent against the Iberville Wholesale Grocery Co., Ltd., the proceedings under Docket No. 14080 will be dismissed.

In the petition filed by the Consolidated Companies, Inc., under Docket No. 14079, it is alleged that the respondent erred in disallowing "a deduction for expense of operating a moving picture theatre in 1918 (viz. Liberty Theatre), $7,197.51 and for the year 1919 of $4,198.58." The proceeding was dismissed in so far as it involved the year 1919, for the reason that no deficiency was determined by the respondent for that year. The petitioner thereafter moved at the hearing for permission to amend its petition by alleging that it was entitled to deduct from its income for 1918, the additional amount of $4,198.58 originally claimed as a deduction from 1919 income. The issue, then, is whether the petitioner has shown itself entitled to a deduction from income for 1918 in the total amount of $11,396.09 on account of the expense of operating the moving picture theatre.

The Liberty Theatre was not at any time operated by the petitioner corporation, but was operated by a separate corporation organized for that purpose, under the circumstances set out in our findings of fact hereinabove. Hence, the petitioner is not entitled to deduct the amount claimed as an expense of operating theatre. If said amount, or any part thereof, is deductible, it can be allowed only as a debt ascertained to be worthless and charged off in 1918, or as a loss sustained in that year.

The petitioner's tax return for 1918 shows, under the heading "Accounts Charged Off," two items designated "Liberty Theatre loss," in the total amount of $7,197.51. There is also evidence that the amount of $4,198.58 was charged off to the same account in 1919. There isno proof, however, that any part of the amount was ascertained to be worthless in 1918, or was in fact worthless. Nor is there any evidence that these amounts represent "losses" sustained in 1918.

The evidence offered by the petitioner on this point is very indefinite and unsatisfactory, but it is shown that the negotiations which resulted in abandonment of the theatre operation were concluded some time in December, 1918, and that the affairs of the theatre corporation could not have been liquidated and its assets distributed among its creditors and stockholders until some time in 1919. In this state of the record the action of the respondent in disallowing the deductions for 1918 is approved.

This petitioner also asserts that the respondent erred in denying its application "for relief and assessment" under sections 327 and 328 of the Revenue Act of 1918, for the six-month period period ended December 31, 1918, for the reason that the petitioner suffered an undue hardship due primarily to the following alleged abnormal conditions: (1) low salaries of officers, (2) large amount of borrowed money, (3) good will not reflected in invested capital, and (4) individual efforts of stockholders without compensation.

The Revenue Act of 1918 provides as follows:

SEC. 327. That in the following cases the tax shall be determined as provided in section 328:

* * *

(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to representative corporations specified in section 328. * * *

The evidence adduced by the petitioner in support of its contentions under this issue discloses that for the six-month period ended December 31, 1918, it paid the following salaries to its officers: president, $1,950; vice president, $2,850; secretary and treasurer, $3,520. The president acted as credit man and devoted approximately one-half of his time to the business. The vice president was a branch manager and devoted his entire time to the business. The secretary and treasurer acted as general manager and devoted his entire time to the business. No proof was offered as to what would have constituted reasonable compensation for the services rendered, or to what extent the low salaries may properly be regarded as an abnormality affecting income, if any.

The second ground alleged as an abnormality is "large amount of borrowed money." At the end of 1918, the petitioner had borrowed money in the amount of $233,813.44, and at that time it had capital stock outstanding in the amount of $613,700. It is not shown that the borrowed money was used in the operation of the business, nor to what extent, if any, the use of borrowed money contributed to the production of the taxable income.

In any event, the mere fact that the petitioner borrowed that amount of money is not shown to have been out of the ordinary or unusual in that line of business.

It is next alleged that the fact that the value of good will was not reflected in invested capital constituted an abnormality which entitles petitioner to special assessment of its profits tax. The record discloses that the petitioner acquired, without cost to itself, whatever good will its predecessor corporation possessed at July 1, 1918, but there are no facts from which we can approximate the value of the good will, or the extent to which it contributed to the production of income, if any.

The remaining ground urged by the petitioner for special assessment is the fact that certain stockholders rendered services to the corporation without compensation. It appears that, upon organization of the corporation in 1918, a considerable amount of its stock was sold to merchants in its trade territory primarily for the purpose of securing new business. Some of these stockholders thereafter also acted in an advisory capacity to the officers and directors of the corporation in regard to the extension of credit, collection of accounts, and other matters. Service was rendered by a particular stockholder only at irregular intervals as matters would arise with which he was familiar. It is further indicated that the character of the services generally was such as might have been rendered without compensation by any person friendly to the corporation, whether or not he was a stockholder.

Upon consideration of the evidence submitted, we are unable to conclude that any abnormal condition affecting the capital or income of the corporation within the meaning of section 327(d) of the Revenue Act of 1918, existed in that year. Accordingly, the action of the respondent in denying special assessment is approved.

Reviewed by the Board.

In the proceeding under Docket No. 14079 judgment will be entered for the respondent. The proceeding under Docket No. 14080 will be dismissed for lack of jurisdiction.

STERNHAGEN, VAN FOSSAN, and MURDOCK concur in the result.

SMITH, TRUSSELL, PHILLIPS, and ARUNDELL dissent on the question of jurisdiction.