Court Opinion

ID: 4625898
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:58:06.169512+00
Date Added: 2024-06-11T07:56:47.288158
License: Public Domain

HARRY WARDMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wardman v. CommissionerDocket No. 22348.United States Board of Tax Appeals17 B.T.A. 866; 1929 BTA LEXIS 2235; October 10, 1929, Promulgated *2235  Section 229 of the Revenue Act of 1921 being expressly limited in its application to any trade or business the net income of which for the taxable year 1921 was 20 per centum or more of its invested capital for such year, a taxpayer seeking the benefits of such section must prove that he comes within the limitations, and where, as in this case, no proof is offered as to net income or invested capital for 1921, the determination of the respondent must be approved.  Meredith M. Daubin, Esq., for the petitioner.  L. A. Luce, Esq., for the respondent.  MORRIS*866  This proceeding is for the redetermination of a deficiency in income tax of $12,074.51 for the year 1921.  The issue presented is whether respondent erred in refusing to tax petitioner's income as a corporation under the provisions of section 229 of the Revenue Act of 1921.  FINDINGS OF FACT.  For a number of years prior to 1921 the petitioner was engaged in a general construction and real estate business in Washington, D.C.  The business was carried on as a sole proprietorship, and capital was a material income-producing factor.  In September, 1921, petitioner decided to incorporate*2236  his business and requested James D. Hobbs, his financial manager, to arrange the details.  Counsel was employed and the legal details incident to the corporation were handled by him.  Prior to incorporation counsel investigated the laws of the various States and concluded that for petitioner's purposes the laws of the State of Virginia were preferable.  On or about January 1, 1922, the incorporators of the Wardman Construction Co. met in the counsel's office to discuss the plan of *867  incorporating the petitioner's business.  This meeting was attended by the petitioner, Thomas P. Bones, engineer for Wardman, James D. Hobbs, Wardman's business manager, Hubbert R. Quinter, and Daniel Thew Wright, petitioner's counsel, the first four named individuals being the incorporators.  It was agreed that the incorporators would organize the corporation for the purpose of taking over the Wardman business and the Wardman interests, and to avail themselves of the advantage of the Internal Revenue laws on the subject to taxation.  No stock was to be sold to the public as all of it was to be issued to Wardman in consideration of the assets and the business.  The offer on the part of the petitioner*2237  was accepted by the incorporators and the details attending the formality of incorporation were initiated.  The original offer and acceptance was oral, as petitioner was dealing with his business associates, but later the proposition was reduced to writing.  Prior to March 22, 1922, Wright transmitted the charter by mail to the Corporation Commission at Richmond, Va.  On March 22 this charter was returned with a letter stating that the powers claimed were too broad and that there should be some limitations, and suggested these limitations.  These suggestions were complied with, the changes were made, and the charter as amended was returned on the same day.  On the morning of March 23, 1922, Wright called the Corporation Commission's office in Richmond and was informed by that office that the papers had been received, had been transmitted to the Secretary of the Commonwealth and that the organization of the corporation was assured on March 23rd.  The articles of incorporation were signed and sealed by the four incorporators on March 20, 1922, and on the same date the articles were certified to by Samuel G. Brent, Judge of the Circuit Court of Alexandria City, as being in accordance*2238  with the law.  The certification by the officials of the State of Virginia appears in the following form: COMMONWEALTH OF VIRGINIA Department of The STATE CORPORATION COMMISSION CITY OF RICHMOND, 23rd day of March, 1922.  The accompanying certificate for incorporation, together with a receipt showing payment of the charter fee required by law, having been presented to the STATE CORPORATION COMMISSION by Harry Wardman, Thomas P. Bones, James D. Hobbs and Hubbert R. Quinter and the Hon. Sam'l. G. Brent, Judge of the *868  Circuit Court of City of Alexandria, having certified that the said certificate has been signed and acknowledged by said applicants in accordance with law, the State Corporation Commission having examined said certificate now declares that the said applicants have complied with the requirements of law, and have entitled themselves to a charter, and it is therefore ordered that they and their associates and successors be, and they are, hereby made and created a body politic and corporate under and by the name of Wardman Construction Company, Incorporated upon the terms and conditions, and for the purposes set forth in said certificate, to the same*2239  extent as if the same were now herein transcribed in full and with all the powers and privileges conferred and subject to all the conditions and restrictions imposed by law.  And said certificate, with this order, is hereby certified to the Secretary of the Commonwealth for record.  WM. F. RHEA Chairman.[SEAL.] N. W. ATKINSON First Assistant Clerk of the Commission.COMMONWEALTH OF VIRGINIA Office of the Secretary of the Commonwealth.  In the CITY OF RICHMOND, the 23rd day of March, 1922 The foregoing charter of Wardman Construction Company, Incorporated was this day received and duly recorded in this office and is hereby certified to the Clerk of the Corporation Court of Alexandria according to law.  B. O. JAMES, Secretary of the Commonwealth.VIRGINIA: In the Clerk's Office of the Corporation Court of Alexandria the 27 day of March, 1922.  The foregoing charter and certificate of the Secretary of the Commonwealth thereon was this day received, duly recorded, and certified to the Clerk of the State Corporation Commission.  Teste: NEVELL S. GREENAWAY Clerk.The initial meeting of the stockholders was held March 30, 1922, and*2240  upon motion the affairs and the management of the corporation were turned over to the officers and directors named in the articles of incorporation.  The assets and liabilities of Harry Wardman were taken over as of January 1, 1922, but the itemized schedules showing such assets, which schedules were required by the laws of the State of Virginia in order to protect the incorporators from individual liability, were filed sometime in August, 1922.  The Revenue Act of 1921 was signed by the President of the United States at 3.55 p.m. on November 23, 1921, and became effective upon its passage.  *869  Respondent held that the corporation had not been organized within the meaning of section 229 of the Revenue Act of 1921, and, therefore, taxed the petitioner's income for 1921 as an individual.  OPINION.  MORRIS: At the hearing counsel for the petitioner moved for judgment for the reason that the respondent failed to file his answer within the time limit as set by Rule 14 of the Board's rules of practice.  Rule 14 provides that after service upon him of a copy of the petition, the Commissioner shall have 60 days within which to file an answer.  The Board's records show that*2241  the petition was filed January 4, 1927, that a copy thereof was served on the respondent January 5, and that the answer was filed March 7, 1927, or the 61st day.  The 60th day, however, being a Sunday, the answer was timely filed, and the petitioner's motion is accordingly denied.  See Rule 61 of the Board's rules of practice.  The sole issue presented by the pleadings is whether the petitioner is entitled to the benefits conferred by section 229 of the Revenue Act of 1921.  That section reads as follows: That in the case of the organization as a corporation within four months after the passage of this act of any trade or business in which capital is a material income-producing factor, and which was previously owned by a partnership or individual, the net income of such trade or business from January 1, 1921, to the date of such organization may at the option of the individual or partnership be taxed as the net income of a corporation is taxed under Titles II and III; in which event the net income and invested capital of such trade or business shall be computed as if such corporation had been in existence on and after January 1, 1921, and the undistributed profits or earnings of*2242  such trade or business shall not be subject to the surtaxes imposed in section 211, but amounts distributed on and after January 1, 1921, from the earnings or profits of such trade or business accumulated after December 31, 1920, shall be taxed to the recipients as dividends; and all the provisions of Titles II and III relating to corporations shall so far as practicable apply to such trade or business; Provided, That this section shall not apply to any trade or business the net income of which for the taxable year 1921 was less than 20 per centum of its invested capital for such year: Provided further, That any taxpayer who takes advantage of this section shall pay the tax imposed by section 1000 of the Revenue Act of 1918 as if such taxpayer had been a corporation on and after January 1, 1921.  One of the provisions of the above quoted section which limits its application is that net income from the trade or business for the taxable year 1921 must be 20 per cent or more of invested capital for that year.  No evidence has been offered to prove either invested capital or net income for 1921, making it impossible for us to determine whether net income for 1921 is more than*2243  or less than 20 per *870  cent of petitioner's invested capital.  In view of the failure of the petitioner to prove the essential facts which would bring him within the provisions of the section, the determination of the respondent is approved.  Judgment will be entered for the respondent.