Opinion
No. J-350.
October 20, 1930.
Suit by the Associated Furniture Corporation against the United States.
Petition dismissed.
This is a suit to recover the sum of $4,089.00, with interest, which amount was paid by the plaintiff as a capital stock tax for the fiscal year ending June 30, 1926. The tax was assessed and paid under section 700 of the Revenue Act of 1924 ( 43 Stat. 325).
The validity of the tax is contested by the plaintiff on the ground it was not engaged in business during the preceding year ending June 30, 1925.
The case having been heard by the Court of Claims, the court, upon the report of a Commissioner and the evidence, makes the following special findings of fact:
1. The certificate of incorporation of the "Associated Furniture Corporation" was received and filed in the office of the secretary of state of the state of Delaware on June 2, 1925. The principal office of the corporation in the state of Delaware is in the city of Wilmington.
The nature of the business of the corporation and the objects and purposes proposed to be transacted, promoted, or carried on by it, as stated in its certificate of incorporation, include the manufacturing, buying, and selling, or otherwise dealing or trading in furniture, fixtures, furnishings, and other kinds of goods, wares, and merchandise; the acquisition of the good will, business, stock, assets, etc., of any person, firm, or association, or corporation, doing business of a character similar to that of the plaintiff; the acquisition, ownership, and disposal of the shares of stock or voting trust certificates, participation certificates, or other certificates issued in respect of the shares of stock of any class of other corporations or associations; the issuance of its own stock of any class, notes, bonds, or other obligations, in payment or exchange for any stock or interest therein, or any notes, bonds, or other securities or contracts of any character; the purchase, ownership, and operation of real estate, improved or unimproved, etc.
2. The organization of the plaintiff corporation was prompted by the desire of the owners of the corporate stocks of the People's Outfitting Company, a corporation of the state of Pennsylvania, with offices at Wilkes-Barre, Pa.; the Colonial Furniture Company, a corporation of the state of Ohio, with offices at Cleveland, Ohio; the People's Outfitting Company, a corporation of the state of Indiana, with offices at Indianapolis, Ind.; the Household Outfitting Company, a corporation of the state of New York, with offices at Syracuse, N Y; the People's Outfitting Company, Inc., a corporation of the state of Ohio, with offices at Springfield, Ohio; and the Household Outfitting Company, a corporation in the state of Pennsylvania, with offices at Scranton, Pa.; to perpetuate the management of the business of the said corporations, all of which were engaged in the dealing or trading in furniture and household furnishings at retail, in the families of the said stockholders. With the exception of a small stock interest in one of the corporations, all of the corporate stock of those corporations was owned by individuals, who were related to each other, either by blood or by marriage.
3. The first meeting of the incorporators and subscribers to the stock of the plaintiff corporation was held on the 2nd day of June, 1925, at Wilmington, Del. At that meeting by-laws for the regulation of the affairs of the corporation were adopted; a board of 9 directors was nominated and elected; the board of directors was authorized, in their discretion, to issue the capital stock of the corporation to the full amount or number of shares authorized by the certificate of incorporation, in such amounts and for such considerations as from time to time should be determined by the board and as might be permitted by law. The secretary presented transfers of subscriptions from the original incorporators and subscribers for the shares of stock held by them, which transfers were upon motion approved.
4. The first meeting of the board of directors of the plaintiff corporation was held in the city of New York on the 15th day of June, 1925. The board of directors was comprised entirely of former stockholders in the six subsidiary corporations. At that meeting forms of certificates for the securities of the corporation were approved; officers of the corporation were elected; it was ordered that the treasurer furnish a surety bond of $50,000; the secretary presented an oath for the faithful performance of his duties; the assignments by the original subscribers to the plaintiff's certificate of incorporation of their several subscriptions to the stock of the plaintiff were accepted; a seal was adopted as the corporate seal of the corporation; the secretary was authorized and directed to procure proper corporate books; the treasurer was authorized to open a bank account on behalf of the corporation; the bank was authorized to make payments from the funds of the corporation on deposit with it, upon and according to the check of the corporation, signed by its president or secretary; the treasurer was authorized to open bank accounts on behalf of the corporation in such banks and trust companies as should be designated from time to time by the president and treasurer; the banks or trust companies were authorized to make payment from the funds of the corporation on deposit with them upon and according to the check of the corporation, signed by its treasurer and countersigned by its president or secretary; the treasurer was authorized to pay all fees and expenses incident and necessary to the organization of the corporation; the treasurer, with the counter-signature of the president or secretary, was authorized to sign all bank paper (other than checks) and all notes and bills of exchange for and on behalf of the corporation; the Corporation Trust Company of America was appointed agent of the corporation in charge of the principal office in Delaware and of the books required by the law to be kept in that office, and the agent upon whom process against the corporation might be served in accordance with the laws of Delaware; the Corporation Trust Company of America was authorized to act upon instructions of designated counsel in respect to any questions in connection with the said agency; the secretary was authorized to sign and seal with the corporation seal a certificate of authorization to said trust company; the chairman advised the board that the several owners of all of the capital stocks and securities of the several corporations named in finding 2 hereof had offered to exchange the stock and securities owned by them for the stock of the plaintiff corporation, and that the said stockholders had offered to enter into an organization agreement with each other and with the plaintiff corporation; the offers of said stockholders to transfer all of the capital stocks and all of the securities of the several corporations mentioned in the organization contract in exchange for stock of the plaintiff corporation were accepted; the officers of the corporation were authorized, upon receipt by the corporation from said stockholders of their certificates for said stock and said securities duly indorsed in blank, to issue to said stockholders temporary receipts, and, as soon as stock certificates were secured, to issue, upon surrender of said receipts, permanent certificates for stock of the plaintiff corporation; the president of the corporation was authorized and directed to enter into an organization contract with the stockholders; the secretary was authorized and directed to affix the seal of said corporation to said contract; the president or either of the vice presidents was authorized and directed to execute contracts on behalf of the corporation providing for the employment of managers and associate managers of the corporation's several stores for the period from June 15, 1925, to December 31, 1929, the annual salary of each such employee to be paid to the employee by such subsidiary of the employer as should be designated from time to time by the employer, and the directors of the corporation appointed and designated said individuals to positions at the said stores; and the treasurer was authorized and directed to pay from the funds of the corporation all of the expenses incident to the organization of a voting trust. The stock of the plaintiff was issued to the former stockholders of the subsidiaries in proportion to their holdings in those subsidiaries and the worth of securities of the subsidiaries held by them.
5. On August 23, 1925, the second meeting of the board of directors of the Associated Furniture Corporation was held at Cleveland, Ohio. The president advised the board that on July 18, 1925, he had rented a safe deposit box for the use of the corporation, and the action of the president and secretary in renting the said safe deposit box was ratified and approved. The chairman of the board read the written offers of two individuals to sell to the corporation certain of its securities; whereupon a resolution providing for the acceptance of the said offers was adopted and the secretary was authorized and directed to notify them of the said acceptance, and the treasurer was authorized and directed to pay the aggregate sum of $464,664.34 to said individuals, upon receipt of the certificates representing their stock and other security holdings in the corporation. Resolutions providing for the payments of dividends were adopted and the executive committee of the corporation was authorized to borrow not to exceed $350,000 for the account of the corporation.
6. The third meeting of the board of directors of the corporation was held at Cleveland, Ohio, February 15, 1926. At that meeting quarterly annual dividends were declared and ordered paid.
7. The second annual meeting of the stockholders of the corporation was held at Cleveland, Ohio, on the 12th day of April, 1926. At that meeting directors were duly elected; certain provisions of the corporation's by-laws were amended; and the board of directors and other proper officers of the corporation were authorized and directed to take all such steps as might be necessary for the redemption and retirement of certain stock, as required by the by-laws of the corporation.
8. The fourth meeting of the board of directors of the corporation was held at Cleveland, Ohio, on April 12, 1926, following the second annual meeting of stockholders. Officers of the corporation were elected. It was ordered that the treasurer furnish a surety bond of $50,000 conditioned upon the faithful performance of his duties, and quarterly annual dividends were declared and ordered paid.
9. Subsequently to June 30, 1925, the plaintiff exercised the right which it had to vote the stock which it held in its several subsidiaries, and elected the members of the boards of directors of those companies. The personnel of the directorates of those companies were interchanged from time to time in order that each of the subsidiary stores might have the benefit of the policies pursued and the methods used by the others. All matters incident to the actual operation of the businesses of the subsidiaries, including the purchase of merchandise, the engagement of employees, other than store managers and associate managers, were left to the discretion of their individual managements and directors. The plaintiff neither loaned money to its subsidiaries nor discounted their notes, nor procured credit for them through dealers. It required only that the subsidiaries furnish monthly trial balance statements to the chairman of the plaintiff's finance committee. He, when in his opinion the cash balances of the subsidiaries as indicated by their monthly statements would permit of it, or when he was so authorized by resolutions of the boards of directors, drew upon the companies for funds which when received were used either to liquidate the plaintiff's bank obligation of $350,000, hereinbefore referred to as having been incurred in the acquisition of certain of its own securities, or for dividend disbursements. The plaintiff maintained no general corporate offices. Its statutory office in the city of Wilmington was in that of its agent, the Corporation Trust Company of America. It employed no clerks or other office employees. It paid neither salaries or directors' fees to its officers and directors. Each of its officers and directors occupied an executive position in one of the subsidiaries, and received his compensation from the company with whose management he was directly concerned. The plaintiff's sole corporate expenses subsequent to the expenses incurred in its organization were those incident to the making of its annual audit.
10. On July 31, 1925, the plaintiff filed a capital stock tax return on the form designated by the Commissioner of Internal Revenue with the collector of internal revenue at Wilmington, Del., and claimed thereon exemption from tax on the ground that it was not engaged in business during the year ended June 30, 1925.
11. Thereafter, prior to May 25, 1927, the Commissioner of Internal Revenue determined that the net fair value of the capital stock of the plaintiff was $4,094,147 and made an assessment of $4,089 against the plaintiff, under section 700 of the Revenue Act of 1924, as and for a special excise tax with respect to carrying on or doing business for the period from June 2, 1925, to June 30, 1925. The said tax of $4,089 was based upon the value as determined by the commissioner of the capital stock of the plaintiff during the date of the issuance of said stock and June 30, 1925.
On June 7, 1927, the plaintiff paid the tax so assessed to the collector of internal revenue at Wilmington, Del.; and on or about December 16, 1927, a claim for refund of that amount was filed with the collector of internal revenue at Wilmington, Del. Thereafter, and on February 27, 1928, the Commissioner of Internal Revenue rejected the said claim in the entirety.
12. The plaintiff has at all times borne true allegiance to the government of the United States and has not in any way voluntarily aided, abetted, or given encouragement to rebellion against the said government. The plaintiff is the sole and absolute owner of the claim herewith presented, and no assignment or transfer of this claim or of any part of it or interest in it has been made by it.
Thomas G. Haight, of Jersey City, N.J. (Robert H. Montgomery and J. Marvin Haynes, both of Washington, D.C., and James O. Wynn, Jr., and Roswell Magill, both of New York City, on the brief), for plaintiff.
Arthur J. Iles, of Indianapolis, Ind., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Argued before BOOTH, Chief Justice, and WILLIAMS, WHALEY, LITTLETON, and GREEN, Judges.
This is a suit to recover the sum of $4,089, with interest, which amount was on July 10, 1927, paid by the plaintiff to the collector of internal revenue at Wilmington, Del., as a special excise tax with respect to the carrying on or doing business for the fiscal year beginning July 1, 1925.
The challenged tax was assessed and collected under authority of section 700 of the Revenue Act of 1924 ( 43 Stat. 325), the relevant part of which reads as follows:
"(a) On and after July 1, 1924, in lieu of the tax imposed by section 1000 of the Revenue Act of 1921 —
"(1) Every domestic corporation shall pay annually a special excise tax with respect to carrying on or doing business, equivalent to $1 for each $1,000 of so much of the fair average value of its capital stock for the preceding year ending June 30 as is in excess of $5,000. In estimating the value of capital stock the surplus and undivided profits shall be included. * * *"
The purpose of the organization and incorporation of the plaintiff was to do the following things: "The manufacturing, buying, and selling, or otherwise dealing or trading in furniture, fixtures, furnishings, and other kinds of goods, wares, and merchandise; the acquisition of the good will, business, stock, assets, etc., of any person, firm, or association, or corporation doing business of a character similar to that of the plaintiff; the acquisition, ownership, and disposal of the shares of stock or voting trust certificates, participation certificates, or other certificates issued in respect of the shares of stock of any class of other corporations or associations; the issuance of its own stock of any class, notes, bonds, or other obligations in payment or exchange for any stock or interest therein, or any notes, bonds, or other securities or contracts of any character; the purchase, ownership, and operation of real estate, improved or unimproved," etc.
It is not contended that the plaintiff was not engaged in carrying on or doing business during the fiscal year beginning July 1, 1925, and ending July 30, 1926, but that it was not so engaged during the preceding year ending June 30, 1925.
It is contended that plaintiff's activities between its incorporation, June 2, 1925, and July 1, 1925, were confined to its organization meeting on June 2d and the meeting of its board of directors on June 15th, and that nothing was done at these meetings other than such routine acts as were necessary to the completing of its corporation organization.
If the plaintiff prior to July 1, 1925, did nothing further than perform such acts as were necessary to complete its corporate organization, it is not subject to the tax imposed for the year beginning July 1, 1925, as subsection (b) of section 700 of the 1924 act provides: "The taxes imposed by this section shall not apply in any year to any corporation which was not engaged in business * * * during the preceding year ending June 30. * * *"
It is not required that a corporation, in order to be liable for the tax, should have been engaged in business the whole of the preceding year, article 28, of Regulations No. 64, providing: "* * * If it was in business even one day of the preceding year and one day of the taxable year it is subject to the tax."
The regulations (article 12) further provide: "* * * No particular amount of business is required to bring a company within the terms of the act."
The decided cases also lay down the same rule. Morrisdale Land Company v. United States, 66 Ct. Cl. 701; Edgar Estates Corporation v. United States, 65 Ct. Cl. 415; Chevrolet Motor Company v. United States, 64 Ct. Cl. 211.
The various activities of the plaintiff are stated in detail in the findings of fact, and it is not necessary to repeat them here. Findings 3 and 4 have to do with the activities of the plaintiff prior to July 1, 1925, and findings 5 and 10, with its transactions and acts subsequent to that date.
Plaintiff's activities subsequent to July 1, 1925, are material only in so far as they may be related to, or are component parts of, its activities during the preceding year, and throw light on whether or not such activities constitute the carrying on or doing business.
Do the acts performed by the plaintiff between the date of its incorporation June 2, 1925, to July 1, 1925, constitute the carrying on or doing business, or were they, as the plaintiff contends, nothing more than formal routine acts necessary to the completing of its corporate organization?
Article 12 of the regulations provides: "A corporation may complete its organization and sell its capital stock for cash without incurring liability, but other activities, such as entering into contracts for the purchase of property or construction of a plant are corporate business acts, and constitute doing business. In other words, it is not necessary that the company be actually engaged in the manufacture of its intended product or that it be actually creating profit or gain to incur liability. The making of contracts, buying of materials or machinery, constructing buildings, employing and discharging of individuals, are necessary business acts leading to the more profitable end of manufacturing certain products." (Italics ours.)
The plaintiff performed all necessary acts to complete its corporate organization, and did complete such organization prior to July 1, 1925. We think the plaintiff, also, between the date of its incorporation and July 1, 1925, engaged in other activities than such as were necessary to complete its organization, and that those activities constitute doing business within the meaning of the statute.
The purposes of the plaintiff's organization as stated in its certificate of incorporation include the "manufacturing, buying, and selling or otherwise dealing or trading in furniture, fixtures, furnishings, and other kinds of goods, wares, and merchandise; and the acquisition of the good will, business, stock, assets, etc., of any person, firm, or association, or corporation, doing business of a similar character, * * * and the issuance of its own or other obligations in payment or exchange for any stock or interest therein. * * *"
In pursuance of the purposes of its organization the plaintiff, by formal act of its directors, on June 15, 1925, acquired all the capital stock of six corporations engaged in business similar to that for the carrying on of which the plaintiff was organized, and issued its own stock in payment therefor. The plaintiff did not acquire the stock of these corporations as an investment. Its acquisition constitutes the carrying on or doing business. Orpheum Circuit, Inc., v. Reinecke (D.C.) 41 F.2d 524.
The plaintiff's board of directors on June 15, 1925, authorized and directed its officers to execute contracts on its behalf for the employment of managers and associate managers for its various stores for the period from June 15, 1925, to December 31, 1928. These contracts were duly executed, and managers and associate managers were, as of that date, designated for all the stores, the stock of which had been acquired by the plaintiff.
The execution of these contracts and the employment of managers and assistant managers for its various stores were acts necessary to enable the plaintiff to carry out the purposes of its organization, and fall squarely within the terms of the regulations that "the making of contracts and the employment and discharging of individuals are necessary business acts. * * *"
The activities of the plaintiff above stated, the acquisition of the stock of various corporations, the making and entering into contracts with individuals as managers and associate managers of its stores from June 15, 1925, all of which acts were performed between the date of the plaintiff's incorporation, June 2, 1925, and July 1, 1925, were not formal routine acts necessary to the completion of the plaintiff's corporate organization. They were acts which constitute the carrying on or doing business.
The plaintiff makes the further contention that, should it be held that the plaintiff was engaged in business during the preceding year ending June 30, 1925, the tax for the fiscal year beginning July 1, 1925, should be based on the fair average value of such stock for such preceding year, and that, since the plaintiff was engaged in business for only a portion of that year, the fair average value of its stock would be that proportion which the number of days in which it was engaged in business bears to the total number of days in the fiscal year ended June 30, 1925. In support of this proposition One Liberty Street Realty Securities Corporation v. Bowers (D.C.) 8 F.2d 278, is cited. In that case the taxpayer had during the preceding year issued additional stock, and the court held that the tax was improperly based on the value of the capital stock at the end of the year, but that it should be based upon the average value for the year.
In the instant case the plaintiff's capital stock was not increased, but remained the same throughout the time it was engaged in business during the preceding year ended June 30, 1925. There being no change whatever in the value of the plaintiff's capital stock during the year, the provision of the statute that the tax be based on the "fair average value" is not applicable.
This question was presented in Alaska Consolidated Canneries, Inc., v. United States, 66 Ct. Cl. 713. The court said: "In the present case the corporation was in existence only for the month of June in the year preceding the taxable period. There was no change whatever in the value of the stock from June 1 to June 30, 1925. Where there is no change in value, there is no occasion for determining the `fair average value.' It is only in case of an increase or a decrease in value that the term used in the statute, `fair average value,' has any importance."
It is the opinion of the court that plaintiff was carrying on or doing business during the fiscal year beginning July 1, 1925, within the meaning of section 700 of the Revenue Act of 1924, and that it was also engaged in business during the preceding year ending June 30, 1925. The taxes plaintiff seeks to recover were legally assessed and collected, and the claim for refund was properly rejected by the Commissioner of Internal Revenue.
Plaintiff's petition is dismissed. It is so ordered.