Opinion
Docket No. 2355.
1944-11-6
MINNESOTA MORTUARIES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Leland W. Scott, Esq., for the petitioner. Edward C. Adams, Esq., for the respondent.
Petitioner, whose shares were owned by two individuals, derived more than 50 percent of its income in each of the taxable years from leasing certain of its buildings to an operating company, most of the shares of which were owned by petitioner. Held, the income derived from such leases was not personal holding company income under section 353(f) of the Revenue Act of 1936, as amended, and petitioner was not a personal holding company during any of the taxable years. Leland W. Scott, Esq., for the petitioner. Edward C. Adams, Esq., for the respondent.
The respondent determined deficiencies in personal holding company surtax and 25 percent penalties thereon for failure to file personal holding company surtax returns (Form 1120-H) for the taxable years 1938 to 1941, inclusive, as follows:
+---------------------------+ ¦ ¦ ¦25-percent¦ +-----+----------+----------¦ ¦Year ¦Deficiency¦penalty ¦ +-----+----------+----------¦ ¦1938 ¦$346.83 ¦$86.71 ¦ +-----+----------+----------¦ ¦1939 ¦7,878.81 ¦1,969.70 ¦ +-----+----------+----------¦ ¦1940 ¦7,915.98 ¦1,979.00 ¦ +-----+----------+----------¦ ¦1941 ¦9,082.00 ¦2,270.50 ¦ +-----+----------+----------¦ ¦Total¦25,223.62 ¦6,305.90 ¦ +---------------------------+
The principal issue is whether petitioner was a personal holding company during each of the taxable years. The determination of this issue involves the question as to whether amounts received by petitioner for the use of its properties during the taxable years constituted personal holding company income under section 353(f) of the Revenue Act of 1936, as amended, and under the corresponding provisions of the subsequent revenue acts. A second issue is whether petitioner is liable for the 25 percent penalties for failure to file personal holding company surtax returns.
Petitioner filed its income and excess profits tax returns with the collector for the district of Minnesota.
FINDINGS OF FACT.
Some of the facts have been stipulated. The stipulation is incorporated herein by reference.
The petitioner is a corporation organized under the laws of the State of Delaware. During the taxable years it kept its books and filed its returns on the cash basis. It did not file personal holding company returns (Form 1120-H) for any of the taxable years. Petitioner's business during each of the taxable years was the owning, holding, and management of real estate and shares of affiliated corporations and other personal property.
Prior to 1929 Walter P. Quist and N. O. Welander were separately engaged in the funeral direction business. In 1929 they entered into negotiations for the merger of their separate businesses. After discussions which continued over a period of seven or eight months, they decided to separate the holding and management of the real property necessary to the conduct of the business from the professional and personal service side of the business. They felt that in this way they could establish a more efficient plan of operation in that the cost of the individual funeral could be more easily determined. It was also believed that this arrangement would facilitate a profit-sharing plan which they had in mind for their employees, based solely upon the personal service of the employee. It was also considered advisable to separate the hazards and risks incident to the operating business from the business of holding and managing the real property. Pursuant to these discussions, two Delaware corporations were organized in 1929; namely, Welander-Quist Co. and Funeral Service Chapels, Inc., Quist and Welander transferred all of the properties of their individual undertaking businesses to the Welander-Quist Co. in exchange for all of that company's capital stock. With the exception of one qualifying share issued to a third party, the stock of the corporation was divided equally between Quist and Welander. Thereafter, the Welander-Quist Co. transferred the operating equipment and all of the other personal property held by it to Funeral Service Chapels, Inc., in exchange for most of that corporation's stock. After this transfer, the Welander-Quist Co. owned the real property and the Funeral Service Chapels, Inc., owned the equipment and other operating assets. In 1937 the name of the Welander-Quist Co. was changed to Minnesota Mortuaries, Inc., and the name of Funeral Service Chapels, Inc., was changed to Welander-Quist Co. During the taxable years the funeral directing business was operated by the Welander-Quist Co. and the title to the real property used in the operating business was in the name of petitioner, Minnesota Mortuaries, Inc., The funeral parlors of the Welander-Quist Co. were housed in buildings owned by petitioner. In each of the taxable years the Welander-Quist Co. paid petitioner $18,000 for the use of petitioner's real estate.
During the taxable years petitioner's capital consisted of 1,500 outstanding shares, of which Walter P. Quist and N. O. Welander each owned 750 shares. During the taxable years petitioner owned 85 percent of the issued and outstanding shares of the Welander-Quist Co. The remaining issued and outstanding shares of this company were held by a trustee in trust for the benefit of the company's employees, including Walter P. Quist and N. O. Welander. The purpose of the trust agreement was to provide a medium whereby employees might share in the profits of the business. Under the trust agreement, the trustee was given the right to subscribe for shares of the capital stock of the company in behalf of employees who might desire to purchase trust units. Upon payment of the purchase price, the employee would receive a trust certificate which was not transferable or assignable and which would not vest in him the rights of a stockholder. He would, however, receive the dividends declared upon the stock purchased in his behalf by the trustee. The company retained the power to decide which employees would be allowed to purchase the trust units and it could at any time retire any of the stock issued to the trustee under the trust agreement. The company was also authorized to remove the trustee at any time and appoint a successor trustee. The employee purchasing the units consented to any action that the trustee might take as a stockholder and the stock was held and voted only by the trustee.
The following table shows petitioner's gross income and the source thereof for each of the taxable years:
+-----------------------------------------------------------------------+ ¦ ¦1938 ¦1939 ¦1940 ¦1941 ¦ +---------------------------------+----------+----------+-------+-------¦ ¦Rent from Welander-Quist Co ¦$18,000.00¦$18,000.00¦$18,000¦$18,000¦ +---------------------------------+----------+----------+-------+-------¦ ¦Rent from store building ¦82.50 ¦135.00 ¦ ¦400 ¦ +---------------------------------+----------+----------+-------+-------¦ ¦Rent from greenhouse ¦649.90 ¦600.00 ¦600 ¦825 ¦ +---------------------------------+----------+----------+-------+-------¦ ¦Rent from farm land ¦44.70 ¦ ¦10 ¦10 ¦ +---------------------------------+----------+----------+-------+-------¦ ¦Insurance on fire loss ¦ ¦244.79 ¦ ¦ ¦ +---------------------------------+----------+----------+-------+-------¦ ¦Dividends from Welander-Quist Co ¦5,016.00 ¦5,016.00 ¦5,016 ¦5,016 ¦ +---------------------------------+----------+----------+-------+-------¦ ¦Dividends from Listoe & Wold, Inc¦4,480.00 ¦2,560.00 ¦2,560 ¦2,358 ¦ +---------------------------------+----------+----------+-------+-------¦ ¦Interest * ¦1,749.00 ¦1,749.00 ¦1,749 ¦1,749 ¦ +---------------------------------+----------+----------+-------+-------¦ ¦General ¦ ¦ ¦ ¦30 ¦ +---------------------------------+----------+----------+-------+-------¦ ¦Total ¦30,022.10 ¦28,304.79 ¦27,935 ¦28,388 ¦ +-----------------------------------------------------------------------+
FN* Note in the principal amount of $29,150 bearing interest at 6 percent per annum given by Welander-Quist Co. on July 9, 1937.
Petitioner reported the above income on its Federal tax returns for each of the taxable years.
Petitioner's assets during all of the taxable years consisted of improved real estate, unimproved real estate, shares of Welander-Quist Co., shares of Listoe & Wold, Inc., shares of Portage Holding Co., and a promissory note of Welander-Quist Co.
Listoe & Wold, Inc., is a Minnesota corporation organized on January 1, 1936. In that year petitioner acquired 68 percent of the issued and outstanding shares of the corporation and during each of the taxable years it continued to hold such shares. The remaining shares of the corporation were held during the taxable years by a trustee in trust for the benefit of employees of the corporation, including N. O. Welander and Walter P. Quist, and for the benefit of Mrs. M. Listoe and Dorothy Listoe. During the taxable years Listoe & Wold, Inc., was engaged in the business of funeral direction and leased its funeral parlors from parties other than the petitioner.
Portage Holding Co. is a Minnesota corporation organized on December 4, 1933. All of its shares, other than qualifying shares, were owned by petitioner during each of the taxable years. Its business consisted of taking and holding miscellaneous assets. It was organized to administer the assets of deceased persons who died without known relatives and whose funerals were conducted by the Welander-Quist Co. or Listoe & Wold, Inc. It acted as special administrator of the assets of such deceased persons. During the taxable years it owned a small house and a membership in an underwriters' organization. It also earned commissions on the sale of fire insurance covering property owned by petitioner, Welander-Quist Co., and Listoe & Wold, Inc.
All of petitioner's real properties, other than the funeral chapels conveyed by Quist and Welander in 1929, were acquired by petitioner by purchase for cash.
None of the petitioner's shareholders had the use, or was entitled to the use, by lease, sublease, or other arrangement, of property of petitioner from which it received rents during the taxable year.
OPINION.
HARRON, Judge:
Respondent determined that petitioner was a personal holding company during all of the taxable years and therefore subject to the personal holding company surtax under the provisions of sections 352, 353, and 354 of the Revenue Act of 2936, as amended, and the corresponding sections of the subsequent revenue acts. Those sections provide that the term ‘personal holding company‘ means any corporation with certain exceptions not material here, if (1) at least 80 percent (70 percent in some instances not involved in this proceeding) of its gross income for the taxable year consists of dividends, interest, royalties, annuities, rents (unless constituting 50 percent of more of the gross income), and other designated items of gross income, and (2) at any time during the last half of the taxable year more than 50 percent in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals. Petitioner concedes that the stock ownership requirement of the statute is met, but denies that at least 80 percent of its gross income during the taxable years was personal holding company income. Since more than 50 percent of petitioner's gross income for each of the taxable years was compensation received from the Welander-Quist Co. for the use of petitioner's properties, both parties agree that the issue narrows itself to a consideration of whether such compensation is deemed to be personal holding company income within the meaning of section 353(f) of the Revenue Act of 1936
and the corresponding provisions of the subsequent revenue acts, which are identical. If such compensation can not be considered as personal holding company income under section 353(f), petitioner was not a personal holding company within the meaning of the statute during any of the taxable years.
Sec. 353(f), Revenue Act of 1936, as amended by sec. 1, Revenue Act of 1937:‘SEC. 353. PERSONAL HOLDING COMPANY $INCOME.‘For the purposes of this title the term ‘personal holding company income‘ means the portion of the gross income which consists of:‘(f) USE OF CORPORATION PROPERTY BY SHAREHOLDER.— Amounts received as compensation (however designated and from whomsoever received) for the use of, or right to use, property of the corporation in any case where, at any time during the taxable year, 25 per centum or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for an individual entitled to the use of the property; whether such right is obtained directly from the corporation or by means of a sublease or other arrangement.‘
Section 353(f) provides that ‘personal holding company‘ income of the corporation if an individual owning 25 percent of the stock has the use of, or right to use, the property. The issue therefore turns on the question of whether during the taxable years any one of petitioner's stockholders was ‘an individual entitled to the use of the property.‘ We think this question must be answered in the negative, under the facts of this proceeding.
The language of the statute appears to be plain and unambiguous. It refers specifically to the use of the property by an individual stockholder. The legislative history of the statute indicates that the use referred to is an actual use rather than a use imputed to an individual from the activities or rights of a corporation in which he owns stock. The statute is explained in the Ways and Means Committee Report on the Revenue Act of 1937 (75th Cong., 1st sess., House Rept. 1546; 1939-1 C.B. (Part 2) 707), as follows:
Subsection (f) includes in personal holding company income amounts received as compensation for the use of, or the right to use, the property of the corporation. However, this rule only applies where during the taxable year of the corporation, 25 per cent or more in value of its outstanding stock is owned, directly or indirectly, by an individual leasing or otherwise entitled to the use of the property. It makes no difference whether the right to use the property is obtained by the individual directly from the corporation or by means of a sublease or other arrangement. Since under existing law, this type of compensation is not now included for the purpose of determining whether the corporation meets the 80 per cent test, the taxpayer may fix such compensation in an amount sufficient to bring its other investment income below the 80 per cent test. It has been shown to the committee that this device has been employed by taxpayers who had incorporated their yachts, city residences, or country houses and had paid sufficient rent to give the corporations enough income from their service to take them out of present section 351. By including this type of income in the definition of personal holding company income, your committee removes this method of tax avoidance.
In this proceeding the fact is uncontroverted that petitioner's properties were used by the Welander-Quist Co. during each of the taxable years in the operation of its funeral directing business. For the use of those properties, the Welander-Quist Co. paid petitioner an annual rent of $18,000. Respondent makes no contention that this amount was not fair and reasonable rent for the properties. Both petitioner and the Welander-Quist Co. have consistently carried on business under the arrangements set forth in the facts since their organization in 1929, which was five years prior to the enactment of the personal holding company surtax provisions. The organization of the two companies served a useful business purpose and there is no element of tax evasion involved in the separation of the business activities of the two companies. Cf. Gregory v. Helvering, 293 U.S. 465.
Respondent argues, however, that since Quist and Welander owned all of petitioner's stock and petitioner controlled the Welander-Quist Co. by virtue of an 85 percent ownership of that company's stock, the use of petitioner's properties must be imputed to Quist and Welander. This contention is untenable in view of the language and legislative history of the statute. The general principle is also well established that an individual, as a stockholder of a corporation, has no right, title, or interest in, or right to use the corporate property. The acts of the corporation are not the acts of the stockholders of the corporation. Fletcher, Cyclopedia Corporations, vol. 1, ch. 2. This is also a rule of general application in tax cases. Moline Properties, Inc. v. Commissioner, 319 U.S. 436; New Colonial Ice Co. v. Helvering, 292 U.S. 435.
Respondent relies principally upon Furniture Finance Corporation, 46 B.T.A. 240. That case, however, is distinguishable on its facts. There, the holding company leased its real property to a partnership which was composed of two individuals who owned all the shares of the holding company. Since a partnership is not considered an entity separate and apart from the individual partners, it was held that each partner was entitled to the use of the property and the rent received by the holding company was ‘personal holding company income‘ under section 353(f). In this proceeding, the petitioner's property was rented to a corporation which was entitled to and did actually use the property, and none of petitioner's stockholders had the right to use such property.
Since the compensation received by petitioner was paid for the actual use of petitioner's properties by the Welander-Quist Co. and no individual had the use of, or right to use, the properties by means of a lease, sublease, or other arrangement, it is held that such compensation was not personal holding company income under section 353(f). Under the circumstances, petitioner was not a personal holding company during any of the taxable years and was not required to file personal holding company surtax returns. Respondent's determination is reversed. Under this holding there are no deficiencies for the taxable years.
Since petitioner was not a personal holding company in the taxable years, the filing of personal holding company returns was not mandatory. Accordingly, the determination that the 25 percent penalty should be added to the tax is also reversed.
Reviewed by the Court.
Decision of no deficiencies will be entered.