Opinion
No. E-125.
October 20, 1930.
Suit by Jute Industries, Limited, against the United States.
Petition dismissed.
This case having been heard by the Court of Claims, the court, upon the evidence adduced, makes the following special findings of fact:
1. The plaintiff is a domestic corporation, whose place of business was in New York City, and during the years 1917, 1918, 1919, and 1920 acted as the New York sales agent of J. A.D. Grimond, Limited, of Dundee, Scotland, manufacturers of burlap and other jute products, and also acted as broker for certain parties who sold jute products manufactured in India. With the exception of a small amount of profit which accrued to the plaintiff from time to time in the way of gains on foreign exchange, plaintiff's sole source of income was from its commissions and brokerages.
2. During the period involved herein plaintiff had outstanding 5,000 shares of preferred stock and 5,000 shares of common stock, each share of each class having a par value of $5. Both classes of stock enjoyed the same voting privileges. From June 14, 1917, to June 29, 1921, the principal stockholders of the plaintiff and the amount of stock held by them were as follows:
---------------------------------------------------------------------------------------------------------- | From June 14, 1917, | From Apr. 1, 1919, to | From Oct. 1, 1919, to | to April 1, 1919 | Oct. 1, 1919 | June 29, 1921 |---------------------|-----------------------|---------------------- | Preferred | Common | Preferred | Common | Preferred | Common -------------------------------------|-----------|---------|-----------|-----------|------------|--------- J. A.D. Grimond (Ltd.), Dundee ... | 2,499 | 1,980 | 2,499 | 2,970 | 2,500 | 2,470 H.N. Gildea, New York .............. | 2,500 | 1,000 | 2,500 | 1,000 | 2,500 | 1,000 E.B. Paynter, New York ............. | None. | 1,000 | None. | 1,000 | None. | 1,500 F.M. Richardson, Dundee ............ | None. | 1,000 | None. | 10 | None. | 10 |-----------|---------|-----------|-----------|------------|--------- Total ............................ | 4,999 | 4,980 | 4,999 | 4,980 | 5,000 | 4,980 ----------------------------------------------------------------------------------------------------------3. In carrying on its business, the plaintiff had no capital which was a material income-producing factor, and no part of the income of plaintiff was derived from trading as a principal or from government contract or contracts.
4. Messrs. Gildea, Richardson, and Grimond, whose names appear in the tabulation in finding 2 hereof as stockholders in the plaintiff corporation, were likewise stockholders in J. A.D. Grimond, Limited, of Dundee, during the several fiscal years which are involved herein.
Prior to May, 1917, the personnel of the plaintiff's New York office was composed of Mr. H.N. Gildea, its president; Mr. E.B. Paynter, secretary and treasurer; and a stenographer-bookkeeper. Both Mr. Gildea and Mr. Paynter devoted their entire business time to the business of the plaintiff. In May, 1917, Mr. Gildea became ill and went abroad, where he remained until his return to New York in May or June of 1919 to again take up his duties as the president of the plaintiff company.
Mr. Paynter left New York for France in the latter part of May or early part of June, 1917, where he saw active service with the French Army and later with the Army of the United States. Mr. Paynter returned to New York in March, 1919, and resumed his duties as an officer of the plaintiff company. During his absence he remained an officer of the plaintiff corporation but drew no salary and performed none of his regular duties.
About a month prior to Mr. Paynter's departure, Mr. Grimond cabled to Mr. William McIntosh Cooper at Toronto, where he was engaged as manager of the Jute Industries of Canada, Limited, requesting him to go to New York, to there take charge of the plaintiff's New York office. Mr. Cooper immediately went to New York in compliance with Mr. Grimond's request and there remained in charge of that office during Mr. Paynter's absence. The only other person employed in the office during that period was a bookkeeper-stenographer.
Neither Mr. Richardson nor Mr. J.B. Grimond was in New York during any part of the period involved herein.
Prior to January, 1919, when Mr. Richardson returned to Dundee to resume his work with J. A.D. Grimond, Limited, of Dundee, and with the plaintiff corporation, he was in active military service in the World War as a major in the Highland regiment. Upon his return to his work the larger portion of his time was taken up in furnishing commodity information and price lists to the plaintiff's New York office and in supervising the manufacture of merchandise which had been sold through that office.
Mr. Grimond devoted a certain portion of his time, just how much does not appear, to answering inquiries made by the plaintiff's New York office, in keeping it informed of conditions in the jute market, and in generally advising with it in the matter of its operations.
In order to successfully conduct its business, it was necessary for the plaintiff's New York office to at all times be fully acquainted with the fundamental and market situations in the jute industry, and it was in collecting and transmitting such information to the plaintiff that Mr. Richardson and Mr. Grimond were able to be of service to the plaintiff.
5. The plaintiff duly filed its corporation income tax returns for the fiscal years ending March 31, 1918, 1919, and 1920, and taxes were assessed and paid in accordance with said returns as follows:
For the period January 1, 1918, to March 31, 1918, a tax of $1,512.97 allocable to said period was paid in installments as follows: $1,062.92 on June 16, 1918; $110.77 on March 19, 1919; $332.31 on June 19, 1919; and $6.97 on February 20, 1923.
For the fiscal year ended March 31, 1919, a tax of $4,854.16 was paid on July 30, 1919.
For the fiscal year ended March 31, 1920, a tax of $12,641.58 was paid in installments as follows: $3,160.40 on June 14, 1920; $3,160.40 on March 17, 1921; $3,160.40 on June 1, 1922; and $3,160.40 on November 1, 1922.
6. Plaintiff duly filed a claim for refund of taxes for the year ending March 31, 1918, in the sum of $1,512.97, and also a claim for refund of taxes paid for the period from April 1, 1918, to March 31, 1920, in the sum of $17,495.75, in each case basing its claim for refund on the ground that it was entitled to classification as a personal service corporation. Both of these claims for refund were rejected by the Commissioner of Internal Revenue.
Robert Ash and Thomas J. Reilly, both of Washington, D.C., for plaintiff.
Lisle A. Smith, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Plaintiff brings this suit to recover $19,008.72 with interest, alleging that this sum has been overpaid on its income and excess-profit taxes.
It appears that during the period in question the plaintiff, a corporation selling goods for J. A.D. Grimond (Limited), of Dundee, Scotland, and other concerns, filed income and excess-profit tax returns for the fiscal years ending March 31, 1918, March 31, 1919, and March 31, 1920. For the period of January 1, 1918, to March 31, 1918, it paid income and excess-profit taxes in the amount of $1,512.97. For the fiscal years ending March 31, 1919, and March 31, 1920, it paid income and excess-profit taxes in the amount of $17,495.75.
For the taxes so paid the plaintiff duly filed claims for refund on the ground that it was entitled to classification as a personal-service corporation under the provisions of the revenue act of 1918. These claims for refund were denied, and plaintiff now brings this suit to recover the amount so paid. The sole issue in the case is whether the plaintiff was entitled to be classified as a personal-service corporation.
The Revenue Act of 1918 ( 40 Stat. 1057, 1058) provides, among other things:
"Sec. 200. That when used in this title — * * *
"The term `personal service corporation' means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor. * * *"
The defendant contends that the plaintiff was not "a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation," and we think this contention must be sustained.
The taxes paid were for a period beginning with March 31, 1917, and ending with March 31, 1919, being the three fiscal years ending March 31, 1918, March 31, 1919, and March 31, 1920. During the period in question the plaintiff had issued and outstanding 5,000 shares of preferred stock and 5,000 shares of common stock, each share of each class having a par value of $5. The evidence shows without dispute that from June 14, 1917, to April 1, 1919, the corporation of J. A.D. Grimond, of Dundee, Scotland, owned 2,499 shares of plaintiff's preferred stock and 1,980 shares of its common stock; that from April 1, 1919, to October 1, 1919, said corporation owned 2,499 shares of plaintiff's preferred stock and 2,970 shares of its common stock; and that from October 1, 1919, to June 29, 1921, the said Dundee corporation owned 2,500 shares of plaintiff's preferred stock and 2,470 shares of its common stock. In other words, during the periods above named the Dundee corporation owned only one share less than half or half of the preferred stock, and of the common stock from about two-fifths to more than half thereof. It is apparent that it was one of the principal stockholders, whose activities are referred to in the statute as necessary to create a "personal-service corporation." The statute further provides that such stockholders must be "themselves regularly engaged in the active conduct of the affairs of the corporation." This Dundee corporation had nothing to do with the active conduct of the affairs of the plaintiff. It is quite clear that this part of the statute refers to the management of the concern which claims to be a personal-service corporation, or some kind of personal service connected with the operation of its affairs. From the very nature of the thing required, being a corporation, the Dundee company could not perform personal services for the plaintiff or bring itself within the provisions of the statute. For these reasons alone we are clear that plaintiff was not within the meaning of the law a "personal-service corporation" during the period in question.
What was said above is sufficient to dispose of the case, but the defendant says that other stockholders, who, together with the Dundee corporation, owned practically all the stock of the plaintiff, were not regularly engaged in the active conduct of the affairs of the corporation, being absent from New York, where the plaintiff carried on its business during nearly all of the period involved. One of these stockholders was H.N. Gildea, who was president of the company and during most of the period in question owned half of the preferred stock and 1,000 shares of the common stock. He was therefore one of the principal stockholders, but appears to have been abroad from May, 1917, until May or June, 1919, as was also Mr. Paynter, who was another of the principal stockholders and secretary of the plaintiff. During the absence of these officers of plaintiff, its business was carried on by W.M. Cooper with the assistance of a bookkeeper-stenographer.
It may well be argued, as counsel for defendant does, that the fact that Gildea and Paynter had nothing to do with the management of the affairs of the plaintiff during the period mentioned in the preceding paragraph is also sufficient to prevent the plaintiff from being entitled to classification as a personal-service corporation, but we do not find it necessary to so decide.
It follows from what has been stated above that the plaintiff's petition should be dismissed, and it is so ordered.