Court Opinion

ID: 4606414
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:38:30.014883+00
Date Added: 2024-06-11T07:53:22.151691
License: Public Domain

P-H GROUP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.P-H Group v. CommissionerDocket No. 98835.United States Board of Tax Appeals43 B.T.A. 1041; 1941 BTA LEXIS 1421; March 19, 1941, Promulgated *1421  A group of individuals loosely organized, whose only business activity was the purchase and sale of shares of stock of a single corporation, held, not an association taxable as a corporation, where legal title to the shares purchased was held by the members and where there was no centralized management of the affairs of the group.  Urban E. Wild, Esq., Milton Cades, Esq., and E. R. Cameron, C.P.A., for the petitioner.  B. H. Neblett, Esq., for the respondent.  SMITH *1041  This proceeding involves income and excess profits tax deficiencies for 1935 in the respective amounts of $7,828.82 and $2,846.84.  The questions in issue are whether the petitioner in 1935 was an association taxable as a corporation and, as such, was subject to income and excess profits taxes, and, if so, whether it is now entitled to declare the value of its capital stock.  FINDINGS OF FACT.  During the latter part of 1927 several individuals at Honolulu, Hawaii, had under consideration plans for making a joint investment in certain sugar interests in the Philippine Lslands.  The originator of the plan was H. Atherton Lee, who for some time had been employed by*1422  the Hawaiian Sugar Planters' Association and was familiar with the sugar cane industry in both Hawaii and the Philippines.  Under date of December 5, 1927, Lee, who was then in the Philippines, where he had accepted a position as a department head of the Philippine Sugar Planters' Association experimental station, wrote a letter to Clinton G. Owen, one of the group in Honolulu, setting forth the circumstances which in his opinion offered a favorable opportunity for investment in the stock of some of the Philippine sugar manufacturing companies.  He stated that under a plan then in operation these companies were able to borrow money on favorable terms from the Philippine National Bank for expansion and development purposes and that the dividends would in all probability be sufficient to repay the loans in a short time, leaving the stock greatly enhanced in value.  He proposed in his letter: * * * that the Hui organize in Hawaii in whatever you consider the best way and make $5,000.00 available by January 15th, another $5,000.00 available March 15th another $5,000.00 about May 15th, and so on at whatever rate that you fellows think that you can raise the money.  You can count on me*1423  for $500.00 at each such two-month installment, and more if pressed and you need it to make *1042  up the quota.  This would be the best for we couldn't use more than $5,000.00 every two months and it also does not put much of a strain on the members of the Hui.  Under date of January 13, 1928, the Hawaiian group organized under an agreement reading in part as follows: HONOLULU, T.H.  January 13th, 1928.INFORMAL MEMORANDUM OF AGREEMENT between the undersigned.  Based upon that certain letter dated December 5th, 1927, received from H. Atherton Lee of Manila, Philippine Lslands, addressed to Clinton G. Owen, we have formed an informal group temporarily known as the PHILIPPINE HUL for the purpose of acting upon the proposition outlined in said letter.  To accomplish, if possible, and secure the advantages outlined in said letter we have subscribed to a fund and paid on account the following amounts set opposite our names, * * * and appointed pro tempore Wm. P. Alexander and C. G. Owen jointly and severally our Agent to receive all monies, and transact the business of the group until such time as a formal organization is effected by us.  Should property be acquired*1424  we authorize same to be held in the name of Wm. P. Alexander and/or C. G. Owen, likewise until such time as the formal organization is effected by us.  We also agree to bear pro rata the incidental expenses in connection with the group for the purpose mentioned above.  There were 16 original subscribers.  Ten of them subscribed $1,000 each, three subscribed $2,000 each, and three subscribed $3,000 each.  Each member paid 20 percent of his subscription in cash and executed a promissory note for the balance, made payable to William P. Alexander and Clinton G. Owen, jointly and severally.  These funds were deposited with the Bishop Trust Co., Ltd., in the name of "C. G. Owen Special Account." Owen later used some or all of these notes as security on loans which he obtained from the bank on his personal note to provide funds for transmittal to Lee for the purchase of shares of stock.  Such loans were all repaid out of the funds contributed by the members on their subscription pledges.  In addition to the above amounts each of the members contributed $5 per $1,000 principal contribution to be used as a working fund.  The selection of the stock in which the investment was to be made*1425  was left to Lee's discretion.  He selected the stock of the Bacolod-Murcia Milling Co., a Philippine corporation operating a large sugar manufacturing plant, as representing the best investment possibilities, and so informed the group.  Over the period July 21, 1928, to November 11, 1930, Lee purchased on behalf of the group 16,352 of such shares and in November 1932, 151 additional shares, at a total cost of [*] 125,737.15, or approximately $62,868 in United States currency.  These shares were represented by 25 certificates, 17 of which were registered in Lee's name, 1 in the name of his wife, and 7 in Owen's *1043  name.  All of the certificates were forwarded to Owen in Honolulu, those not standing in his name being endorsed to him, and he deposited them for safekeeping with the Pacific Trust Co., Ltd., of Honolulu, successor to the Bishop Trust Co., Ltd.Meetings of the P-H Group were held from time to time, usually at Owen's office at the Pacific Guano & Fertilizer Co., and matters pertaining to the investment were discussed.  Several additional members were admitted to the group and some of the old members increased the amounts of their contributions so that at the*1426  close of 1930 there were 27 members with a total investment of $64,700.  Some of the members assigned a portion or all of their interest to others and a deceased member's interest was acquired by his testamentary trustee.  There was never any formal organization of the group.  No bylaws or articles of association were ever adopted.  Minutes were kept of some of the meetings by one of the members, which show the election of officers from time to time, each of the members having voting power in proportion to his contribution to the fund.  However, these officers had no general powers or duties and they could act for the members only as specifically authorized by them.  They had no discretionary powers in the matter of purchase and sale of shares of stock.  No certificates of interest or other evidence of ownership in the assets of the group were issued to any of the members until October 1934.  During that year one of the members died and his executor, the Bishop Trust Co., Ltd., requested some evidence of his interest in the group assets.  In compliance with that request Owen, who was acting as treasurer, on October 2, 1934, prepared and issued to each of the members a "CERTIFICATE*1427  OF OWNEFSHIP" in the following form: This is to certify that you are the owner of an interest amounting to Fifty, six hundred and forty-sevenths (50/647) of the PH GROUP'S net worth at this time, by reason of the fact that you have paid $5,000.00 into the fund of $64,700.00, which is the total paid in by the members of the Group.  At this date the Group owns 16,503 shares of the Bacolod-Murcia Milling Company of Negros, Occidental, Philippine Islands.  In addition to these shares there is a fund on hand on deposit in the Bishop National Bank of Hawaii at Honolulu amounting to approximately $2,000.00.  This fund is held at interest and is the current working capital of the Group, and, of course, the amount changes from time to time as interest is received and expenses are incurred.  In 1934 certain interests in the Philippine Islands offered to purchase all of the shares of Bacolod-Murcia Milling Co. stock then held by the group at a price of [*] 15 per share, or approximately $122,262 for the 16,503 shares.  All of the members of the group agreed to sell at that price and accordingly the sale was made in February *1044  1935.  The proceeds from the sale were deposited*1428  with the Bank of Honolulu to the joint account of Herbert M. Richards, then president, and Ronald Q. Smith, secretary of the group, and were later distributed to the members in proportion to their investments.  The P-H Group never engaged in any business activity except the purchase and sale of the Bacolod-Murcia Milling Co. stock.  Its income and expense accounts show the receipt of small amounts of interest on bank deposits and the payment of small amounts of interest on borrowed money, and miscellaneous expenses such as transmittal fees, cablegrams, etc.  It had no salaried officers or employees and no overhead expenses.  OPINION.  SMITH: Considering the limited purpose for which the P-H Group was formed, the informal manner of its organization, its restricted business activities, and the absence of resemblance to corporations, we think that it lacked the essential features of an association taxable as a corporation.  The decided cases do not offer any uniform test for distinguishing associations taxable as corporations from syndicates, joint adventures, trusts, partnerships, and other types of organizations.  As stated in *1429 : * * * it is impossible in the nature of things to translate the statutory concept of "association" into a particularity of detail that would fix the status of every sort of enterprise or organization which ingenuity may create.  * * * It is a question that must be determined on the facts and circumstances of each particular case.  Some of the "salient features" of the trust under consideration in , which characterized it as an association, were that it was created and maintained as a medium for carrying on a business enterprise and sharing the gains; the trustee as a continuing entity held title to the property embarked in the undertaking; and there was centralized management, continuity of interests, and limitation of personal liability.  Unquestionably the P-H Group embodied, more or less vagely, some of these features.  It was organized and maintained for the purpose of making a profit, which was realized and shared by the participants, and was therefore a "business enterprise." See *1430 ; affd., ; . It does not appear, however, that the P-H Group or any one acting for it ever acquired ownership of the shares of stock purchased on behalf of the individual members.  Lee purchased the shares merely as agent for the other members and he never became the legal owner of the stock.  Likewise, some of the certificates were *1045  issued to Owen and the others were endorsed to him but he acquired no legal title to them.  He acted merely as agent for the members of the group.  Apparently ownership of the shares remained in the individual group members, each owning a proportional undivided interest in the whole.  Cf., in this respect, , affirming . Neither was there any centralized management of the business enterprise.  No individual or group of individuals had any authority to purchase or sell any shares of stock for the group except as instructed by the group as a whole.  The so-called officers of the group had no general*1431  powers or authority and their duties were purely ministerial.  Cf. Gibbs-Preyer Trust #1,; affd. (C.C.A., 6th Cir.), . Although some of the members testified that they did not consider that they had any personal liability beyond the amount of their subscription pledges, there was no expressed limitation of personal liability in their agreement and no apparent basis for the assumption that there was any such limitation.  The facts in the instant case more nearly resemble those in , and , than any of the numerous cases cited by counsel for the respondent in his brief.  See also ; . As was held in those cases, we hold in the instant case that the P-H Group was not an association taxable as a corporation.  With this disposition of the principal issue, it is not necessary to determine whether the petitioner is entitled to declare a value for its capital stock.  Decision of no deficiencies will be entered.