Court Opinion

ID: 4626254
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:58:51.189205+00
Date Added: 2024-06-11T07:56:50.264448
License: Public Domain

ROE STEPHENS MANUFACTURING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Roe Stephens Mfg. Co. v. CommissionerDocket Nos. 8636, 9997.United States Board of Tax Appeals12 B.T.A. 1254; 1928 BTA LEXIS 3376; July 10, 1928, Promulgated *3376  The determination of the respondent that the petitioner is taxable as a corporation for the taxable years in question approved.  John C. Spaulding, Esq., for the petitioner.  A. H. Fast, Esq., for the respondent.  MORRIS*1254  These proceedings are for the redetermination of deficiencies in income and profits taxes for 1917 and 1918.  The deficiency for 1918 *1255  is $27,309.34, but the record does not show the amount thereof for 1917.  The petitioner alleges that the respondent erred in determining that it should be taxed as a corporation instead of a partnership during each of the years.  The proceedings were consolidated for hearing and decision as the same question is presented in each case.  FINDINGS OF FACT.  The petitioner was incorporated under the laws of the State of Michigan in May, 1886, to engage in the manufacture of valves, lubricators, injectors, and other things of brass and other metals.  The duration of its corporate existence was fixed at 30 years from date of the articles of association, which is May 26, 1886.  The petitioner had two plants up to the first of the year 1916, one known as the Stephens plant, manufacturing*3377  plumbing and heating valves, and the other known as the Michigan plant, manufacturing water-works equipment.  In 1916, a few months prior to the expiration of its charter, the Michigan plant was sold to a newly organized corporation known as the Flower Stephens Manufacturing Co.  By this sale all stockholders, other than the members of the Thomas family, were taken out of the business.  Thereafter the active stockholders of the petitioner were C. W. Thomas and his three sons, F. P. Thomas, R. J. Thomas, and E. W. Thomas.  The sale of the Michigan plant was one of the steps toward consummating the plan urged by C. W. Thomas, the principal stockholder, to liquidate the business so that he might retire.  The sons of C. W. Thomas felt that the business should be continued, but were unable to finance it without the assistance of their father.  It was not until late in 1918 that this difference of opinion was finally adjusted, at which time it was agreed to reincorporate the business as the Scott Valve Manufacturing Co. From the date of the expiration of the charter until December 16, 1916, when formal notice of dissolution was filed, the matter of whether the corporation should be continued*3378  in the manner provided for under the statute was discussed by the stockholders and dissolution was finally agreed upon.  Between those dates, viz, May to December, 1916, all of the current bills were discounted.  The corporation had no long-term contracts, nor were there any outstanding debts in the month of May which remained outstanding in December for current obligations incurred.  There was, however, an indebtedness of $26,000 to a bank, secured by the personal endorsement of C. W. Thomas.  There were sufficient quick assets on hand to pay all of the outstanding debts of the petitioner at that time.  *1256  On December 16, 1916, the directors filed with the Secretary of State the following notice of dissolution: MICHIGAN NOTICE OF DISSOLUTION ROE STEPHENS M'FG. CO., DETROIT, MICH., Dec. 16 1916.We, the undersigned, being a majority of the last Board of Directors of Roe Stephens M'fg Co., a corporation doing business under the provisions of Act No. 232, Public Acts of 1903, hereby give notice in accordance with the requirements of Section 12 of said Act, that said corporation has been dissolved by Limitation of term.  C. W. THOMAS, F. B. THOMAS, R. J. *3379  THOMAS, E. W. THOMAS, Majority of Directors.Recorded December 30, 1916.  Thereafter in February, 1917, the petitioner requested information from the Secretary of State relative to the necessity for filing a corporate report with the Department of State subsequent to the date of dissolution.  The reply to this request is set out below: MARCH 1, 1917.  ROE STEPHENS MANUFACTURING COMPANY, Mr. C. W. THOMAS, President, Detroit, Michigan.DEAR SIR: Replying to your inquiry of February 26, we will say that it is not necessary for a corporation to file a report for the year 1916, when such corporation has presented for record a notice of dissolution.  You state in your letter, "for the close of the year 1917," but we assume you mean 1916.  Respectfully, (Signed) COLEMAN C. VAUGHAN, Secretary of State.From the date of the expiration of its charter in 1916 to January, 1919, when the business was reincorporated as the Scott Valve Manufacturing Co., it was conducted in the same manner and under the same corporate name that had theretofore been used and the same books of account, and forms of billheads and letterheads were used.  The active owners held some*3380  meetings during 1917 and 1918 for the purpose of discussing the business, and they kept records of these meetings, but not in any formal manner.  No articles of copartnership were drawn up for continuance of the business after its charter had expired but the stockholders of the old corporation considered that they were thereafter operating as a partnership because of the fact that the said charter had expired.  They understood that their stock should not be pledged for loans, sold, or transferred and they considered themselves partners but did not send out or publish a *1257  general notice to that effect.  They did not transfer the corporate assets to their individual accounts.  During the taxable years 1917 and 1918 C. W. Thomas was approached by John F. Flower and an attorney representing the Flower-Stephens Mfg. Co., the corporation which had purchased the petitioner's Michigan plant, with the proposition of buying petitioner's remaining plant.  At such conferences C. W. Thomas informed Flower and the attorney that the petitioner's charter had expired and that the business was being conducted as a copartnership until he, C. W. Thomas, could determine what he was going to*3381  do.  In the latter part of 1918 C. W. Thomas definitely decided to stay in the business and in January, 1919, a new corporation, known as the Scott Valve Mfg. Co., was organized by C. W. Thomas and his three sons, who took stock in the new corporation in the same proportion as their interest in the old.  The assets of the petitioner were taken over by the new corporation and a deed of the property was given by petitioner to the new corporation.  At or about the same time the stock of the old corporation was turned in and canceled.  In preparing its return for 1917 the situation with respect to the petitioner was laid before the collector of internal revenue in Detroit.  At that time the officers of the petitioner were advised to file a return as a corporation, and accordingly for the year 1917 petitioner filed its return on a corporate form.  In connection with its 1917 taxes the following letter was addressed to the "Collector of Revenues" at Detroit: DETROIT, MICH., July 23, 1917.Hon. COLLECTOR OF REVENUES, U.S. Post Office Building, Detroit, Michigan.DEAR SIR: Some days since I called at your office in regard to Corporation Tax.  There is a question whether*3382  that we should make a report, owing to the fact that our Charter expired May 26th, 1916, as you will please note from letter of Secretary of State with whom we filed dissolution, so our corporation is practically dissolved as a corporation by expiration of its charter.  The writer called at your Office today and was advised that we had better make out a report and state the facts, but upon my return at the Office I recalled that I had left a blank in your office and if it is necessary for us to make out report we shall be glad to do so, although we hardly know what basis on which to do this.  It is our expectation to incorporate a Co. so soon as we can close up the books of the present Corporation.  According to the Statutes we are allowed three years to do this.  However, we anticipate doing so within the next thirty or sixty days.  Of course it is our expectation to report on Income Tax and pay our Income Tax when it falls due.  Please return the letter from the Secretary of State when through with same.  We merely send same for verification of our claim.  Yours very truly, ROE STEPHENS MFG. CO., (Signed) C. W. THOMAS, *1258  At the bottom of the above letter*3383  was written in ink the following: "No report for 1917 will be demanded of Old Co. which dissolved Jan. 5, 1917." The stamped signature appended was that of James J. Brady.  A second letter of similar import was addressed to the collector as follows: DETROIT, MICH. July 7th, 1918.Hon. JAMES J. BRADY, Internal Revenue Collector, Detroit, Mich.DEAR SIR: I am in receipt today of copy of supplementary statement of Corporation Undistributed Net Income Tax return.  You will no doubt recall that I wrote you last year that our corporation extension ended in May, 1916, and that we were closing up the concern as a corporation but would re-incorporate after the affairs were put into shape.  The concern as it exists now is more of a co-partnership, the writer owning nearly all of the stock and his family owning the balance, but some of the stock corporation was pledged for the writer's individual indebtedness, so we have been working to wipe that out before we incorporate a new Company.  The writer owes the First & Old Detroit National Bank $65,682.95.  The Company has no indebtedness except its monthly purchases which amount to about $25,000, but it needs money to carry on*3384  the business.  We have purchased $30,800 worth of U.S. Bonds, as a Company, and $1,000 worth of War Savings Stamps, so that practically all of our net income has been invested.  Our bookkeeper has made out a memorandum report in pencil, which I trust you will have submitted and see how near correct it is, and have an extra blank sent us and I will have the proper blanks filled out and verified.  The indebtedness shown are figures put in by the writer which he did not give to the bookkeeper, but can be verified by referring to the First & Old Detroit National Bank.  Thanking you for your attention and trusting that you will advise whether this is correct the way it is made out, I am, Your truly, (Signed) C. W. Thomas.  P.  CWT:GC For 1918 a tentative corporate return was filed by the auditor who was changing the books over to the Scott Valve Mfg. Co., whereby it was shown that there were taxes due in the amount of approximately $35,000.  Accompanying the tentative return was a check for $15,000 in part payment of the taxes.  The several stockholders filed amended individual returns and reported their proportionate share of the total profits resulting from the operation*3385  of the business of the Roe Stephens Manufacturing Co., and paid taxes thereon.  The respondent determined that petitioner was taxable as a corporation and rejected a claim in abatement on the 1917 taxes and determined that the tax liability for 1918 was $42,309.34.  This *1259  amount was reduced by the $15,000 accompanying the tentative return and the balance of $27,309.34 was assessed as a deficiency for 1918.  OPINION.  MORRIS: The sole question raised by these proceedings is whether the petitioner was a partnership during the years in question.  The respondent decided that it was taxable as a corporation.  The petitioner in effect attempts to overcome the presumption of the correctness of the respondent's determination in two ways: (1) The introduction of evidence from which the legal conclusion may be drawn that a partnership existed; (2) a showing that the legal effect of the continuance of the business after the expiration of the charter was that the business was operated as a partnership.  The petitioner concludes from the evidence introduced that a partnership agreement was entered into.  We are unable to agree with this conclusion, however.  The testimony indicates*3386  to our minds that the witnesses were drawing legal conclusions as to the effect of the expiration of the corporate charter, rather than giving us sufficient facts from which we, ourselves, could draw a conclusion.  The record shows that there were several discussions in regard to the dissolution of the company, the trend of which was that said dissolution "would make us have no charter and we figured therefore, we would be a co-partnership; we figured we were liable individually for the debts of the concern." All of the testimony in relation to an agreement was of the same character, from which we are unable to find that a partnership agreement was actually entered into.  We were not given sufficient facts as to the operation of the business from which a partnership agreement could be implied.  On the contrary, the record refutes such implication.  The manner of conducting the business remained unchanged during the years in question.  The corporate assets were not distributed to the shareholders nor were entries made on the books to their individual accounts; the same books of accounts, letterheads and method of business procedure were used without sending out a general notice to*3387  creditors showing that the business was being operated on a different basis; the capital stock of the old corporation remained outstanding and a portion thereof was pledged as security on a loan made by C. W. Thomas; and upon the organization of the Scott Valve Manufacturing Co. the assets were transferred directly from the old corporation to the new.  There is no evidence that the partnership certificate required by the Michigan statute was filed by the petitioner.  In the letter addressed *1260  to the collector by C. W. Thomas in connection with the 1919 return, it was stated: It is our expectation to incorporate a company so soon as we can close up the books of the present corporation.  According to the statutes we are allowed three years to do this.  However, we anticipate doing so within the next thirty or sixty days.  Viewing the facts in the record in their most favorable light, we are of the opinion that they fall far short of establishing the existence of a partnership during the taxable years.  The petitioner contends that the powers of the corporation to do business ended with the term of its corporate existence and thereafter the assets of the corporation belong*3388  to the stockholders as tenants in common, and cites several cases wherein it was held that the relations of stockholders in an expired corporation are analogous to those of partners.  Those cases, however, deal with a rule of property and not a rule of taxation and are not determinative of the issue before us.  See . The Supreme Court of the United States in , said: The term partnership as used in these sections [218(a) and 335(c) of the Revenue Act of 1918] obviously refers only to ordinary partnerships * * *.  It is true that Congress can not convert into a corporation an organization which by the law of its state is deemed to be a partnership.  But nothing in the constitution precludes Congress from taxing as a corporation an association which, although unincorporated, transacts its business as if it were incorporated.  The power of Congress so to tax associations is not affected by the fact that, under the law of a particular state, the association can not hold title to property, or that its shareholders are individually liable for the association's debts, *3389  or that it is not recognized as a legal entity.  It is one of the chief characteristics of the partnership relation that it is created only by the voluntary contract of the parties, and that as between the parties it does not arise in any case by operation of law.  Persons can not become partners except by agreement, expressed or implied.  Unable, as we are, to find that there was an express agreement, and that facts of record not evidencing an implied agreement, we can not find error in the respondent's action in taxing the petitioner as a corporation during the taxable years in question.  The facts in the , relied upon by the petitioner are clearly distinguishable from those in the instant case, and the principle therein laid down is accordingly not applicable.  Reviewed by the Board.  Judgment will be entered under Rule 50.