Court Opinion

ID: 4635040
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:17:17.646981+00
Date Added: 2024-06-11T08:42:09.209912
License: Public Domain

FARMERS & MERCHANTS BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Farmers & Merchants Bank v. CommissionerDocket No. 8898.United States Board of Tax Appeals10 B.T.A. 447; 1928 BTA LEXIS 4104; February 1, 1928, Promulgated *4104  Determination of Commissioner that two corporations were affiliated affirmed.  Alvin B. Peterson, Esq., for the petitioner.  W. F. Wattles, Esq., for the respondent.  PHILLIPS *447  This proceeding is for the redetermination of deficiencies in income and profits taxes for the calendar years 1920, 1921, 1922, and 1923, inclusive, in the amounts of $881.08, $169.67, $144.35, and $25.54, respectively.  It is alleged that the Commissioner erred by including as a part of petitioner's income the income of the Farmers & Merchants Realty Co. and in treating petitioner and the Farmers & Merchants Realty Co. as affiliated corporations and computing the deficiencies on the basis of a consolidated return.  FINDINGS OF FACT.  Petitioner is a Wisconsin corporation with its principal office at Muscoda, Grant County, Wis.  It was organized in 1911 with 65 stockholders and capital stock of $20,000.  The amount of its capital stock and the number of its stockholders remained the same until 1922, when its capital stock was increased to $40,000 and the number *448  of its stockholders to 67.  Since 1911, petitioner has used, as a banking room, space in an*4105  old three-story building, known as the Smalley Building.  On October 25, 1919, the petitioner and Mrs. Smalley, the owner of this building, executed an instrument known as a "bond for a deed." This instrument provided for the payment by the petitioner to Mrs. Smalley of $6,100 in cash at the time of its execution.  By its terms Mrs. Smalley agreed to convey the Smalley Building to petitioner, its successors and assigns, upon the further payment of $10,000 on October 25, 1929.  Mrs. Smalley reserved the right of demanding one-half of such future payment on October 25, 1924.  Petitioner agreed to pay interest on the unpaid balance at 6 per cent per annum and to pay all taxes on the property.  By this same instrument, Mrs. Smalley leased the premises to petitioner.  The amounts which petitioner had agreed to pay for interest and taxes were the amounts to be paid as rent for the use and occupation of said premises.  In 1919 and 1920, the Wisconsin statutes prohibited a bank incorporated under its laws from investing more than 25 per cent of its capital and surplus in a bank building.  The purchase price of the Smalley Building, as set out in the above contract, was greater than 25 per*4106  cent of the authorized capital and surplus of petitioner.  The Farmers & Merchants Realty Co. was incorporated on March 25, 1920.  Ten shares of the capital stock of this company, of the par value of $100 each, were issued on October 30, 1920.  The first meeting of the stockholders and directors was held on the same date.  The 10 persons to whom 1 share each of the stock of the realty company was issued were stockholders of petitioner, owning a total of 33 per cent of its outstanding stock, and 7 of them were directors of the petitioner.  The president, vice president, cashier, and assistant cashier of the petitioner were stockholders in the realty company.  On October 30, 1920, petitioner's board of directors passed a resolution to sell the above-mentioned bond for a deed or land contract to the realty company for $6,000.  At about the same date, petitioner's directors resolved to extend a line of credit to the realty company in the amount of $17,500.  Extensive alterations were made to the building.  On October 30, 1920, a lease of the northwest portion of the first floor and basement of the Smalley Building was entered into between petitioner and the realty company, which said*4107  lease provided: This agreement, made and entered into this 30th day of October 1920, by and between the Farmers and Merchants Realty Company of Muscoda, Wisconsin, party of the first part and the Farmers & Merchants Bank of Muscoda, Wisconsin, party of the second part, WITNESSETH: For and in consideration of the proper performance of the agreements of said second party hereinafter agreed to be performed first party hereby leases *449  and lets to second party, for the term, of ten years from this date, the northwest portion of the first floor as per plan now working on, and basement, of the property of said first party in the Village of Muscoda, known as the Smalley House, and further agrees that second party shall have the privilege of purchasing the whole of said SmalleyHouse property now owned by first party, at any time within the said ten years, by paying to said first party the actual net cost of said property to said first party, at the time second party shall exercise its option, but allowing to said first party seven per cent, per annum upon the capital stock of said first party for such period or periods as first party has not disbursed dividends during the term*4108  of this contract to be added to said actual net cost.  (The term, "net cost" as used herein, shall mean the first cost of said property, plus cost of all improvements, expenses of operation and taxes, and less all earnings.) First party further agrees that, if within the said ten years, second party shall elect to purchase said property as hereinbefore mentioned, first party will credit upon said purchase price all moneys that may have been paid by second party.  For and in consideration of the proper performance by said first party of its agreements herein agreed to be performed, second party hereby agrees to pay to said first party, as rental for the said premises, all of the net profits of said second party, in each year, over and above the sum of ten per cent per annum upon the capital stock of said second party, with the proviso that said second party may elect to pay the sum of two thousand dollars or more per annum in any year, in lieu of the earnings of said second party over and above 10% per annum on its capital stock, and the first party hereby agrees that second party may have such option.  It is further mutually agreed that no more than seven per cent per annum shall*4109  be paid upon the stock of first party, and that no officer or employee of said first party shall receive any recompense or remuneration for any services rendered first party in the conduct of its business, and that first party will complete the improvements now in process, according to plans and specifications already approved.  This agreement shall bind the successors and assigns of the respective parties hereto.  The premises described in this contract were those occupied by petitioner during the years under consideration.  The realty company rented the other portions of the Smalley Building to other tenants, who paid their rent at the bank of the petitioner, where it was credited to the account of the realty company.  At the date of the hearing, petitioner was paying an annual rental to the realty company.  In 1920, petitioner paid to the realty company for rent $3,500 and the same amount in 1921.  Since 1921, it has paid $3,000 a year.  Petitioner and the realty company have each filed separate tax returns from their incorporation until the date of the hearing.  The realty company carried an account and had a line of credit with petitioner at the date of the hearing.  It*4110  borrowed money from petitioner.  The two companies had offices in the same building.  The books of the realty company were kept in petitioner's vaults and entries therein were made by the assistant cashier of petitioner under the supervision of petitioner's cashier.  *450  The rate of depreciation on the Smalley Building for the years under consideration was 3 1/3 per cent.  The Commissioner added the income of the Farmers & Merchants Realty Co. to the net income of petitioner and treated the two corporations as affiliated.  OPINION.  PHILLIPS: The Commissioner determined that the petitioner was affiliated with the Farmers & Merchants Realty Co. and falls within the provisions of section 240 of the Revenue Acts of 1918 and 1921, which provide for a consolidated return of income in the case of affiliated corporations.  Subdivision (c) of that section provides that two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by nominees substantially all the stock of the other or others, or (2) if substantially all the stock of the two corporations is owned or controlled by the*4111  same interests.  The Commissioner having determined that the two corporations were affiliated, the burden was upon the petitioner to establish the contrary.  The evidence is not only insufficient to overcome this burden, but all that we have goes to show that the stockholders of the realty company were, in fact, nominees of the bank.  If this were not so, no such lease as that made between the bank and the realty company could ever have been effected.  The action of the Commissioner must be affirmed.  The parties also joined issue as to the rate of depreciation on the Smalley building, but settled this issue by stipulation.  Decision will be entered on 20 days' notice, under Rule 50.