Court Opinion

ID: 4633731
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:14:33.233209+00
Date Added: 2024-06-11T07:58:06.652646
License: Public Domain

ERVING V. DWYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Dwyer v. CommissionerDocket No. 17638.United States Board of Tax Appeals18 B.T.A. 349; 1929 BTA LEXIS 2072; November 26, 1929, Promulgated 1929 BTA LEXIS 2072">*2072 Held, respondent did not err in including in the income of a partnership commissions accrued on its books as earned on transactions conducted by a corporation in which the members of the partnership owned all of the stock.  J. Lewis Furman, Esq., for the petitioner.  Paul L. Peyton, Esq., for the respondent.  VAN FOSSAN 18 B.T.A. 349">*349  Petitioner seeks a redetermination of a deficiency in income tax for the calendar year 1920 in the sum of $832.93.  The petitioner is a member of a partnership doing business under the firm name of Charles Collins Co.  He alleges that the respondent erroneously included in the partnership income for the year 1920 the sum of $12,668.38 which represented commissions accrued on the books of the partnership.  At the hearing the petitioner abandoned the only other ground for relief alleged in his petition.  FINDINGS OF FACT.  During the year 1920 the petitioner and his brother, Arthur G. Dwyer, were the members of a partnership doing business under the firm name of Charles Collins Co., which was engaged in buying and selling live poultry on a commission basis in the City of New York.  The partnership was organized in1929 BTA LEXIS 2072">*2073  1903.  In 1907 it became difficult for the partnership to obtain regular deliveries of live poultry.  Therefore, in order that regular deliveries of live poultry to the partnership might be assured, the petitioner and his brother caused the Collins Produce Co., a corporation, to be organized under the laws of the State of New York, with intent to use this corporation to buy live poultry in the Middle West.  The Collins Produce Co. was capitalized in the sum of $2,000, divided into 200 shares of common stock of the par value of $10 each, and all the capital was paid in by the partnership.  One hundred shares of the corporation's stock were issued to the petitioner, 99 shares to Arthur G. Dwyer, the other member of the partnership, and one share to J. Cyril Begg, an employee of the partnership.  The two members of the partnership and J. Cyril Begg were the directors of the corporation and the petitioner and his brother were the only officers of the corporation until it was dissolved in 1924 or 1925.  For one or two years the petitioner and his brother were paid salaries as officers of the corporation in the amount of $1,475 per annum each.  Contemporaneously 18 B.T.A. 349">*350  with the incorporation1929 BTA LEXIS 2072">*2074  of the Collins Produce Co., the partnership sent two of its employees, Begg and Marsh, to the Middle West, instructing them to buy live poultry in the name of the corporation and to ship same to the partnership.  It was agreed that Begg and Marsh were to receive 50 per cent of all profits from the sale of such poultry after the deduction by the partnership of a commission of 5 per cent of the gross receipts.  These two employees of the partnership bought in the name of the corporation the poultry thereafter shipped to the partnership as herein set forth.  The corporation did not maintain any regular books of account.  The only records kept were in the form of daily reports addressed to the partnership, showing each day's purchases, cash on hand and the funds required by the corporation to carry on its business.  The corporation, however, kept a separate bank account and paid all its bills by its checks drawn on this account.  The corporation's income-tax report for the year 1920 shows that the gross sales of the corporation for 1920 amounted to $892,074.93, of which about $230,000 represented the gross proceeds from sales of poultry shipped to and sold by the partnership in New1929 BTA LEXIS 2072">*2075  York City.  The balance, namely about $660,000, was the proceeds from the sales of eggs and a small quantity of hides.  The partnership had a working agreement with Armour & Co. and Swift & Co. pursuant to which all eggs collected by the corporation in connection with the purchase of live poultry were shipped to the plants of Armour & Co. and Swift & Co. and the drafts covering these transactions drawn by the corporation on the partnership were taken up by the said two companies, respectively.  No accounting with respect to the egg transactions appears on the partnership books.  During the year 1920 whenever the corporation made a shipment of live poultry to the partnership it drew a draft for the estimated net proceeds and the partnership paid the draft.  Upon receipt of such shipment the partnership sold it in the open market in New York, debited the shipment with the amount of the draft paid on the shipment, and the cost of freight and other expenses, including a commission of 5 per cent of the gross sale price, and credited the shipment with the gross amount of the sale.  In 1920 the total commissions so charged amounted to $12,665.29.  These debits and credits were also posted1929 BTA LEXIS 2072">*2076  to the account maintained with the corporation in the partnership ledger and the commissions were credited to the partnership's earnings account.  If the proceeds from the sale of a shipment of live poultry exceeded the total charges against that shipment, the corporation drew a draft on the partnership for the net amount.  Such drafts were honored by the partnership.  If, however, the total charges against this shipment exceeded the 18 B.T.A. 349">*351  proceeds from the sales of that shipment, the partnership drew a draft on the corporation for the balance and the draft was honored by the corporation.  When the corporation needed funds for its business operations it would draw on the partnership and deposit the proceeds of the draft in its own account.  The amounts of such drafts were charged against the corporation on the partnership books.  On January 1, 1920, the Collins Produce Co. account showed a debit balance of $20,872.47 and on December 31, 1920, a debit balance of $14,276.98.  The partnership handled its business with the corporation on the same basis as it did business received from other concerns and recorded transactions in its books in the same manner as it recorded other1929 BTA LEXIS 2072">*2077  sales made on a commission basis.  It had been the consistent practice of the partnership from 1907 to charge the corporation commissions upon the sales made and include such commissions as part of its income.  The balance due from the corporation at the end of each year was carried forward as an account receivable by the partnership.  The partnership included as income in its return for the year 1920 the said commissions amounting to $12,665.29.  MOTION TO DISMISS.  In May, 1925, by an order to show cause the respondent moved that this proceeding be dismissed on the ground that the Board was without jurisdiction.  The hearing on the merits of the proceeding had been held prior to the date the motion to dismiss was made.  The facts on which the motion was based are as follows: On April 15, 1926, the Commissioner of Internal Revenue mailed to Erving V. Dwyer, the petitioner in this proceeding, a 60-day letter with respect to the alleged deficiency in income tax for the year 1920.  On June 14, 1926, namely, within 60 days after April 15, 1926, the petition in this proceeding was received by this Board and was stamped received on that day.  The petition was, however, returned1929 BTA LEXIS 2072">*2078  to the petitioner because of his failure to pay the $10 filing fee.  On June 19, 1926, the petition was again received by this Board and a proper filing fee of $10 was also received from the petitioner.  The motion coming on to be heard, decision thereon was reserved.  OPINION.  VAN FOSSAN: The motion to dismiss the proceeding is denied in accordance with , and . 18 B.T.A. 349">*352  The petitioner claims that the respondent erroneously included, in the income for 1920 received by the partnership of which the petitioner was a member, commissions charged on the partnership books against the Collins Produce Co., a corporation.  The petitioner insists that the corporation was a mere arm of the partnership, owned and controlled by the members of the partnership and operated by them and at their expense solely for partnership purposes.  He argues that the facts show that the commissions in question were never earned or paid and that it was never intended by the partners that they should be treated or included as a part of their earnings.  He claims that the sole reason1929 BTA LEXIS 2072">*2079  these commissions were entered in the partnership books was to furnish a basis for determining the net profit, if any, derived from the sale of the live poultry shipped to the partnership by the corporation so as to calculate the commission of 50 per cent of net profit to be paid to the partnership employees, Begg and Marsh, as agreed between the partnership and those employees.  The petitioner argues that we should disregard the theory of corporate entity and hold that the corporation was in realty a mere branch of the partnership and that the partnership could not charge a commission against itself or collect income from itself.  Courts do sometimes look beyond the corporate form and hold that the fiction of corporate entity may be disregarded when the corporation is so organized and controlled as to make it merely an instrumentality or adjunct of another business organization.  ; , and . However, when courts of equity have invoked this principle they have done so in general, to prevent the use of the corporation by individuals or another corporation1929 BTA LEXIS 2072">*2080  or corporations to perpetrate a fraud or to do injustice.  There is no question of fraud in the present proceedings and we are of the opinion that the facts would not justify a disregard of the separate corporate entity of the Collins Produce Co.  The operations of the corporation, including its gathering and shipment of live poultry to the partnership, were carried on from 1907.  While it is claimed by the petitioner that the corporation's operations were directed by the members of the partnership, it is to be noted that the two members of the partnership were the officers of the corporation and constituted a majority of its board of directors, of which the third member was an employee of the partnership.  The corporation was, therefore, operated by its officers and directors.  Its operations were kept distinct from those of the partnership.  Its shipments of live poultry to the partnership and the sale thereof by the partnership were handled in the same way and were recorded in the partnership books in the same manner as those of any 18 B.T.A. 349">*353  other concern for which the partnership sold live poultry on commission.  Moreover, in its egg and hide transactions, the corporation1929 BTA LEXIS 2072">*2081  had sources of revenue other than that derived from the live poultry business or from advances made by the partnership.  So far as the evidence shows, the corporation made no accounting to the partnership in respect to the egg and hide transactions and nothing in regard thereto appears on the partnership books.  In our opinion it is not to be concluded that the commissions in question were fictitious or that they were never earned or paid.  The facts do not so show.  On the contrary, it is inferable that the amount of these commissions was paid, was received by the partnership and was, therefore, earned.  From 1907, during the life of the corporation, commissions on sales were charged to the corporation by the partnership in the same manner as they were charged in 1920.  The partnership kept an open account with the corporation.  This account consisted of debits and credits as set forth in the statement of facts and a balance between these debits and credits was struck at the end of the year.  The partnership carried that balance forward as an account receivable from the corporation.  This balance, according to the evidence, was made up of overdrafts by the corporation.  At the beginning1929 BTA LEXIS 2072">*2082  of 1920 the debits balance shown on the partnership books in the corporation's account was $20,872.47 and at the end of 1920 this balance had been reduced to $14,276.98.  While this reduction was taking place and during the year 1920 the live poultry business, amounting to about $230,000, was carried on as set forth in the statement of facts and the commissions based thereon were charged against the corporation.  It therefore follows, in our opinion, that at the end of 1920 not only had the commissions charged during the year been paid out of the sales of live poultry or out of other income of the corporation, but the corporation had also reduced the indebtedness to the partnership by more than $6,000.  We are, therefore, of the opinion that the respondent did not err by including the commissions in question in the partnership income for the year 1920.  Decision will be entered for the respondent.