Court Opinion

ID: 4631384
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:09:31.960567+00
Date Added: 2024-06-11T07:57:42.739761
License: Public Domain

NEKONEGAN PAPER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Nekonegan Paper Co. v. CommissionerDocket No. 21064.United States Board of Tax Appeals16 B.T.A. 1000; 1929 BTA LEXIS 2474; June 11, 1929, Promulgated 1929 BTA LEXIS 2474">*2474  Deduction of an amount representing compensation for services rendered, allowed.  H. A. Mihills, C.P.A., for the petitioner.  Harold Allen, Esq., and W. R. Lansford, Esq., for the respondent.  MARQUETTE 16 B.T.A. 1000">*1000  This proceeding is for the redetermination of a deficiency in income and profits-taxes asserted by the respondent in the amount of $48,156.43 for the period January 1, to October 9, 1920.  Only so much of the deficiency is in controversy as arises from the refusal of the respondent to allow as a deduction from gross income the amount of $7,500.02 claimed by the petitioner as an ordinary and necessary business expense.  FINDINGS OF FACT.  The petitioner was during the year 1920, and had been for several years, a corporation organized under the laws of Maine, and engaged in producing ground wood pulp at Old Town, Me.  Edward B. Draper, William D. Hunt, and George W. Barnjum were in the early part of the year 1920, coowners of certain timber lands situated principally in the State of Maine, and were engaged in manufacturing lumber and in producing logs and wood for the purpose of making wood pulp.  Draper was engaged on extensive pulp1929 BTA LEXIS 2474">*2475  wood contracts for three corporations, of which he was the principal stockholder, and through two lumber corporations he was cutting and manufacturing lumber, and in addition he was carrying on a personal business in connection with the manufacture of ground wood pulp.  He maintained an office at Bangor, Me., for the purpose of general administrative work, forestry investigations, accounting, auditing and other activities connected with the timber and wood pulp business.  This office occupied two floors of an office building, and employed about 70 persons.  The companies which Draper represented were the Thurston Pulp Wood Co., Molunkus Pulp Wood Co., E. A. Johnson Co., and H. F. Eaton Sons Co.  The office of the Draper organization performed all the clerical, administrative and accounting work for Draper's individual business and for the several corporations in which he was interested, none of said companies having offices other than in the Draper office, with the exception of small woods or mill headquarters.  At the close of the accounting period the total administrative charges were determined upon Draper's 16 B.T.A. 1000">*1001  books, and they were then prorated among the companies whose1929 BTA LEXIS 2474">*2476  business affairs were being conducted in the Draper offices.  Early in the year 1920, Barnjum, Hunt and Draper learned that Alden P. Webster and Fred Webster, who owned all of the capital stock of the petitioner, desired to dispose of their interests.  The petitioner had been operating at a loss, but notwithstanding that fact Barnjum strongly advocated the purchase of the stock, under the belief that conditions would rapidly improve in the ground wood pulp industry and for the further reason that Barnjum, Hunt, and Draper had been planning to get into the ground wood pulp business in order to utilize the stumpage which they controlled as owners of timber lands.  On April 19, 1920, Barnjum, Hunt and Draper purchased from Alvin T., and Fred Webster, the entire capital stock of the petitioner.  It was the intention of Barnjum, Hunt, and Draper to immediately form a new corporation to take over the business then conducted by the petitioner.  It was accordingly agreed by them that all the administrative and general conduct of the business would be considered as the administrative office of the petitioner, and that Draper would be paid a reasonable compensation for the services of his1929 BTA LEXIS 2474">*2477  administrative organization, but no definite amount was determined at that time on account of the difficulty of estimating the proper charge.  Thereafter, the accounts reflecting the operation of the petitioner were maintained in memorandum form, entirely disassociated from the accounts reflecting the business of the petitioner prior to April 19, 1920, and they were handled through the office of Draper.  Barnjum, Hunt, and Draper were active in conducting the activities of the petitioner after April, 1920, and they secured a large volume of business.  In October, 1920, they made arrangements to incorporate under the name of The Nekonegan Paper Corporation.  The new corporation was organized on October 9, 1920, and on October 16, 1920, a meeting of the stockholders and a meeting of the directors were held at the office of Draper at Bangor, Me.  The minutes of these meetings are in part as follows: Pursuant to the foregoing waiver of notice a meeting of the stockholders of Nekonegan Paper Corporation was held at the office of E. B. Draper, Bangor, Maine, on the sixteenth day of October, 1920, at 4 o'clock p.m. * * * The president reported to the meeting that this company could1929 BTA LEXIS 2474">*2478  probably acquire all the capital stock of the Nekonegan Paper Company by issuing $200,000 par value of its preferred stock.  * * * On motion duly made and seconded it was unanimously 16 B.T.A. 1000">*1002  VOTED: That as soon as this company has acquired all the stock of the Nekonegan Paper Company the directors be and hereby are authorized if in their judgment it seems best, to have the Nekonegan Paper Company dissolved, and all the assets and business taken over by this company, and to have this company assume any or all of its liabilities and that they be further authorized to carry on the business theretofore carried on by the Nekonegan Paper Company.  * * * Pursuant to the foregoing waiver of notice a meeting of the directors of Nekonegan Paper Corporation was held at the office of E. B. Draper, Bangor, Maine, on the 16th day of October, 1920, at 4:10 o'clock p.m. There was presented to the meeting a letter from Mr. George W. Barnjum offering to have transferred to this company $100,000 par value of the stock of the Nekonegan Paper Company, being all the stock of that company, in consideration of this company's issuing $200,000 par value of its preferred stock.  Copy of this1929 BTA LEXIS 2474">*2479  letter is filed with the records.  On motion duly made and seconded, the following vote was thereupon unanimously passed: VOTED: That WHEREAS, George W. Barnjum has paid for the stock of the Nekonegan Paper Company the sum of $175,000 and has since that date advanced to said company $25,000, making a total cost to him of $200,000, and WHEREAS, in the judgment of the directors said stock has a value of at least the said sum of $200,000, NOW, THEREFORE, be it RESOLVED: That the said offer of George W. Barnjum be accepted, and that upon receiving transfer of the said stock of the Nekonegan Paper Company the president and treasurer be and hereby are instructed to issue $200,000 of the preferred stock of this company, as set forth in said letter of Mr. Barnjum.  * * * On motion duly made and seconded it was unanimously VOTED: That as soon as the stock of the Nekonegan Paper Company is acquired steps should be taken to have the company go out of business, and have all its assets taken over by this company, and for this purpose the president and treasurer are authorized to execute an agreement in the name of this company assuming any and all indebtedness of the Nekonegan1929 BTA LEXIS 2474">*2480  Paper Company, and they are further authorized to carry on the business of the Nekonegan Paper Company, and to accept the deeds, bills of sale and other papers necessary to transfer the property of the Nekonegan Paper Company to this corporation.  WHEREAS, on April 19, 1920, when all the stock of the Nekonegan Paper Company was sold by Alden P. Webster and others it was intended that this corporation should be organized to acquire the same; and the stock of the old company was held by William D. Hunt, George W. Barnjum, and Edward B. Draper, as record holders but in reality as trustees for the account of this company until it could be organized.  NOW, THEREFORE, be it VOTED, That all transactions taking place since April 19, 1920, shall be considered to be for the account of this new company, and not for the account of the record holders of the stock of the old company who were merely the trustees.  and accordingly the Treasurer and Assistant Treasurer are instructed to have 16 B.T.A. 1000">*1003  the books of this company opened as of April 19, 1920, and treat all transactions since that date as the business of this new company.  * * * The outstanding capital stock of the petitioner1929 BTA LEXIS 2474">*2481  at the date of its sale to Draper, Hunt, and Barnjum, and in October, 1920, was of the par value of $100,000.  On October 16, 1920, the said capital stock was transferred by Barnjum, Hunt, and Draper to the Nekonegan Paper Corporation in exchange for $200,000 par value preferred stock of that corporation.  The assets of the petitioner were transferred to the Nekonegan Paper Corporation on October 16, 1920, pursuant to action duly taken by the stockholders of the petitioner at a meeting held that day at the office of Draper at Bangor.  The minutes of said meeting in so far as they are material here, are as follows: The president reported that the Nekonegan Paper Corporation was the record holder of all the stock of this company, except certain qualifying directors' shares, and that it wished to have this company cease to do business and transfer all its assets to its stockholders, and that in order to enable the company to so transfer its assets the Nekonegan Paper Corporation had executed an agreement assuming all the debts and liabilities of this company except certain liabilities for income taxes, which liabilities had been assumed by the Websters prior to the sale of the stock1929 BTA LEXIS 2474">*2482  of this company on April 19, 1920.  A copy of this agreement was filed with the records.  The president further reported that the record holders of the three shares not owned by the Nekonegan Paper Corporation had assigned all rights to dividends on said shares, including dividends in liquidation to Nekonegan Paper Corporation, and that if this company dissolved all its assets should, therefore, be transferred to Nekonegan Paper Corporation.  Thereupon, on motion duly made and seconded, it was VOTED: That the president be and hereby is authorized and directed to transfer to the Nekonegan Paper Corporation all the assets, business and good will of this company.  There was presented to the meeting, a draft of a bill of sale transferring all the business, assets, and good will of this company to Nekonegan Paper Corporation, except the real estate of this company, and agreeing to transfer said real estate.  A copy was filed with the records.  On motion duly made and seconded it was unanimously VOTED: That the president be authorized to execute this agreement or an agreement of a similar nature; that they be authorized to assign the insurance policies and any other papers or1929 BTA LEXIS 2474">*2483  property this company may own.  On motion duly made and seconded it was unanimously VOTED: That the president, Mr. E. B. Draper, be and hereby is directed to transfer to Nekonegan Paper Corporation, a Maine corporation, all the real estate, rights of way and other real rights of every name and nature which this company may own or be in any way entitled to, and for this purpose is directed to sign, execute and deliver such deeds as he in his judgment may deem necessary.  16 B.T.A. 1000">*1004  WHEREAS, on April 19, 1920, when all the stock of this company was sold by Alden P. Webster and others it was intended that a new corporation should be organized to acquire the same, and the stock was held by William D. Hunt, George W. Barnjum and Edward B. Draper, as record holders but in reality as trustees for the account of the new company until such new corporation could be organized.  NOW, THEREFORE, be it VOTED: That all transactions taking place since April 19, 1920, shall be considered to be for the account of the new company and not for the account of the record holders of the stock who were merely trustees and accordingly the Treasurer and Assistant Treasurer are instructed to have1929 BTA LEXIS 2474">*2484  the books of this company closed as of April 19, 1920, and to treat all transactions since that date as business of the new company.  * * * On April 23, 1921, the Secretary of State of Maine issued a certificate stating that having received satisfactory proof that the petitioner had ceased to transact business, it was and would be thereafter excused from filing annual returns.  The compensation finally agreed upon and paid to Draper for the services of his administrative organization on behalf of the Nekonegan activities for the period April 19 to December 31, 1920, was $15,000.  That amount was officially authorized at a meeting of the board of directors of the Nekonegan Paper Corporation held on December 20, 1920.  The minutes of that meeting in so far as they are pertinent here, are as follows: * * * The attention of the directors was called to the fact that a large portion of the management and clerical work of the Nekonegan Paper Corporation was being handled by men in the employ of Edward B. Draper.  Thereupon, on motion duly made and seconded it was VOTED: To reimburse said E. B. Draper for his outlay in the above matter to the extent of $15,000.00 for the fiscal1929 BTA LEXIS 2474">*2485  year ending March 31, 1921, and that the Treasurer or Assistant Treasurer be instructed to pay said E. B. Draper for his charges not to exceed the above limit whenever requested by Mr. Draper.  Prior to the year 1920 the petitioner had made its returns of income on the basis of a calendar year.  The petitioner's directors erroneously believed that the existence of the petitioner terminated on April 20, 1920.  They accordingly filed a return for the petitioner for the period January 1, 1920, to April 20, 1920, and determined that the fiscal year of the new corporation should start April 1, 1920.  A return was filed for the new company, the Nekonegan Paper Corporation, for the fiscal year ended March 31, 1921.  The respondent has determined that the petitioner should have filed its return for the calendar year 1920, and he has refused to allow as a deduction from gross income any part of the $15,000 paid to Draper for his services for the period April 19, 1920, to December 31, 1920.  16 B.T.A. 1000">*1005  The petitioner kept its books and made its returns on an accrual basis.  OPINION.  MARQUETTE: The petitioner claims that in computing its net income for the period January 1 to October 9, 1920, there1929 BTA LEXIS 2474">*2486  should be allowed as a deduction the amount of $7,500.02, representing a portion of the amount of $15,000 paid to Draper for the services rendered by him to the Nekonegan activities during the period April 19 to December 31, 1920.  The respondent concedes that the amount which the petitioner seeks to deduct represents a reasonable compensation to Draper for the services performed by him during the period April 19 to October 16, 1920.  We are of the opinion that the record herein sustains the petitioner's contention.  The respondent has determined that the business and income we are here considering were from April 19 to October 16, 1920, the business and income of the petitioner and not of the new corporation.  On April 19, 1920, Draper, pursuant to an agreement between him and the other stockholders of the petitioner, assumed the administrative and accounting work of the petitioner with the understanding that he would be paid a reasonable amount for his services.  When the petitioner disposed of its assets on October 16, 1920, and ceased to transact business, there was due from it to Draper reasonable compensation for the services rendered by him, even though the amount was then1929 BTA LEXIS 2474">*2487  undetermined.  The liability to Draper was assumed by the new corporation, together with the other liabilities of the petitioner, and was ascertained and paid.  That it was assumed and paid by the new corporation did not, however, change the fact that it was primarily the obligation of the petitioner and a proper deduction in computing the petitioner's income for the taxable year.  Reviewed by the Board.  Judgment will be entered under Rule 50.