Opinion
Docket Nos. 55983 55984.
1956-06-12
SIMONSEN INDUSTRIES, INC., ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Philip D. Caloger, Esq., for petitioners. Andrew Kopperud, Jr., Esq., for respondent.
Philip D. Caloger, Esq., for petitioners. Andrew Kopperud, Jr., Esq., for respondent.
PROPERTY HELD PRIMARILY FOR SALE TO CUSTOMERS— PROPERTY PROPERLY TO BE INCLUDED IN INVENTORY.— Petitioners and others joined in a joint venture, called a syndicate, to purchase wire from the War Assets Corporation; the wire was purchased in 1946; some of the wire was sold in each of the years 1946 through 1951, and some wire was on hand at the end of each year. Sales were frequent and continuous in each year and expenses were incurred. In each year, the syndicate determined its profits from sales by use of inventories, and for each year prior to 1950 gross profit was reported on the basis of inventories. Held: (1) The wire was stock in trade of the syndicate and stock on hand at the close of each taxable year, 1950 and 1951, was properly included in the syndicate's inventory. (2) The wire was held primarily for sale to customers in the ordinary course of its business. Accordingly, ordinary income rather than capital gain was realized.
The Commissioner determined deficiencies in income tax for the years 1949, 1950, and 1951, as shown below, and in Docket No. 55984, he determined an addition to the tax for 1950 under section 294(d)(2), 1939 Code:
+---------------------------------------------+ ¦Docket No.¦Year ¦Deficiency¦Sec. 294 (d) (2)¦ +----------+------+----------+----------------¦ ¦ ¦ ¦ ¦ ¦ +----------+------+----------+----------------¦ ¦ ¦( 1950¦$3,319.65 ¦ ¦ +----------+------+----------+----------------¦ ¦55983 ¦( 1951¦4,683.43 ¦ ¦ +----------+------+----------+----------------¦ ¦ ¦( 1949¦776.42 ¦ ¦ +----------+------+----------+----------------¦ ¦55984 ¦( 1950¦12,970.25 ¦$2,060.91 ¦ +----------+------+----------+----------------¦ ¦ ¦( 1951¦14,115.71 ¦ ¦ +----------+------+----------+----------------¦ ¦ ¦ ¦ ¦ ¦ +---------------------------------------------+
Petitioners were members of a syndicate which purchased and sold music or piano wire and they reported income from sales of wire by the syndicate. The issue is whether the wire was not a capital asset under section 117(a)(1)(A), 1939 Code, i.e., whether it was property held primarily for sale to customers in the ordinary course of business, and was the kind of property which would properly be included in inventory, so that gains on sales are taxable as ordinary income; or whether the wire was held as an investment so that the gains are taxable as long-term capital gains.
In Docket No. 55984, certain adjustments are not contested. The addition to the tax for 1950 under section 294(d)(2), 1939 Code, is not contested; it is in issue to the extent only, that the determination of the main issue affects the computation under section 294(d)(2).
FINDINGS OF FACT.
Simonsen Industries, Inc., filed its corporation income tax returns for 1950 and 1951 with the collector of internal revenue for the first district of Illinois. Edward H. and Ethel G. Simonsen filed joint returns for 1949, 1950, and 1951, with the collector for the first district of Illinois.
Simonsen Industries, Inc., is an Illinois corporation having its place of business in Chicago. Edward H. and Ethel G. Simonsen, husband and wife, were residents of Chicago during the taxable years.
Simonsen Industries, Inc., is engaged in merchandising metal products such as fishing tackle and tool boxes. Simonsen Metal Products Company is an Illinois corporation engaged in manufacturing metal products such as fishing tackle, tool boxes, and other items.
Edward H. Simonsen is president of Simonsen Industries, Inc., and he and his family own substantially all of the stock of that corporation. Edward H. Simonsen is president of Simonsen Metal Products Company, and he and his wife own all of its stock.
On May 11, 1946, Simonsen Industries, Inc., Simonsen Metal Products Company, Edward H. Simonsen, Ethel G. Simonsen, and others entered into a written syndicate agreement which provided as follows:
a. The Simonsen Wire Syndicate (hereinafter sometimes referred to as syndicate) was organized for the purpose of acquiring, financing, and marketing certain surplus war stock of music wire and piano wire from the War Assets Corporation.
b. Each member of the syndicate was to share in profits and losses of the venture in proportion to his contribution of capital after deducting $150,000 which was to be contributed by Simonsen Metal Products Company.
c. Edward H. Simonsen, Reinhardt J. Wagner, and John Hanisch were to be the syndicate managers, and Edward H. Simonsen was to be chairman of the managing committee.
d. Edward H. Simonsen, as chairman of the syndicate managers, was to receive 10 per cent of net sales, and ‘net sales' was defined as the gross amount received less the cost of merchandise sold, less freight and other direct charges.
e. The syndicate managers were to manage the affairs of the syndicate and were to be repaid for reasonable expenses of the syndicate operations.
f. The managing committee conducted the operations of the syndicate, and the other members of the syndicate assumed no active part in the management of the syndicate.
g. The syndicate managers were to use the facilities of Simonsen Metal Products Company and were to pay that company a reasonable amount for such services in handling the merchandise, including but not limited to accounting and auditing services, rent, light, power, insurance, use of personnel, telephone, and office expenses.
h. After all of the merchandise purchased by virtue of the syndicate agreement had been resold, the syndicate was to be dissolved.
From May through November 1946, the syndicate purchased music and piano wire in approximately 57 different lots from the War Assets Corporation for a total net price of $191,592.51. Freight on the wire amounted to $24,687.34, so that the total cost of the wire was $216,279.85. There were no additional purchases of wire by the syndicate, nor did the syndicate purchase or sell any other product. The term ‘music wire’ includes piano wire, and the parties have used both terms interchangeably and as meaning the same thing.
The syndicate purchased, in 1946, 37 different sizes of wire, and all of the wire purchased weighed approximately 1,500,000 pounds.
The wire was purchased by the syndicate for the same price which the United States set in selling it to other countries.
The syndicate thought that the piano wire or music wire, was something they could buy, sell, and merchandise at a profit. It was purchased with the sole and exclusive objective of reselling the wire as soon as possible after acquisition, and members of the syndicate did the best they could to move it. The members of the syndicate believed, in 1946, that they could dispose of the wire in 2 years or thereabouts.
All of the wire purchased by the syndicate was manufactured by corporations in the United States which are still in business. The wire was of different thicknesses or diameters, some being finer than a strand of hair.
Simonsen Wire Syndicate filed partnership returns of income (Form 1065) in each of the 6 years 1946 through 1951; the returns show the following:
a. For the taxable year 1946, the syndicate reported an ordinary loss of $7,962.76. The return shows gross receipts from business, $34,758.11; merchandise bought for sale, $216,949.43; inventory at end of year, $181,463.27; gross loss from business, $728.05; salaries and wages, $4,317.63; rent, $1,350; insurance, $628.54; supplies, $692.90; and sundry expenses, $245.64. Schedule G shows no gains or losses from sales or exchanges of capital assets. Question 3, on page 3, asks the nature of the organization filing the return; it is answered that it is a partnership. The partnership reported income on an accrual basis and stated that inventories were valued at cost or market, whichever was lower. Schedule I shows as partners each of the petitioners, and Simonsen Metal Products Co., and Springs Incorporated.
b. The syndicate's 1947 return is similar to the return for 1946 and shows an ordinary loss of $3,757.40.
c. The syndicate's 1948 return states that it is a wire jobber, that merchandise bought for sale amounted to $10,489.24, and that there was an ordinary loss of $9,948.29.
d. The syndicate's 1949 return is similar to the return for 1948 and shows sales expense of $1,368.82, and an ordinary loss of $2,194.14.
The individual income tax return of Edward H. Simonsen and Ethel G. Simonsen for the year 1949 shows in Schedule E.— ‘Income from Partnership, * * *,‘ an ordinary loss of $3,730.61 from Simonsen Wire Syndicate.
Simonsen Wire Syndicate reported a profit for the first time on its 1950 partnership return. On the syndicate's returns for 1946 to 1949, inclusive, ordinary losses were reported, and on its 1950 and 1951 returns net long-term capital gains were reported in the amounts of $86,885.86 and $69,463. 34, respectively. The 1948 and 1949 returns show that the syndicate was in the business of wire jobbers, and the 1950 and 1951 returns state the syndicate business as ‘Investment in Wire.’ Syndicate returns for 1946 to 1949, inclusive, name five partners, namely, Simonsen Metal Products Co., Simonsen Industries, Inc., Springs Incorporated, Edward H. Simonsen, and Ethel G. Simonsen; and the 1950 and 1951 returns show 16 partners.
The 1950 and 1951 returns of Simonsen Industries, Inc., and the 1950 and 1951 returns of Edward H. Simonsen and Ethel G. Simonsen, report long-term capital gains from Simonsen Wire Syndicate.
The Syndicate determined its gross profits from sales in each of the years 1946 to 1951, inclusive, by use of inventories. In valuing inventories recognition was given to the fact that some of the wire had a reduced or little value because of the following: (1) Some coils were rusted, damaged, or partly used. The syndicate valued its inventory at cost or market, whichever was lower. Inventory with a cost of $146,590.69 was valued on December 31, 1949, at $94,045.51, or $52,545.18 below its cost.
The number of sales and dollar volume of sales made by the syndicate were as follows:
+-----------------------------------------+ ¦ ¦No. of sales ¦Dollar volume ¦ +------+------------------+---------------¦ ¦Year ¦made during year ¦of sales ¦ +------+------------------+---------------¦ ¦ ¦ ¦ ¦ +------+------------------+---------------¦ ¦1946 ¦112 ¦$34,758.11 ¦ +------+------------------+---------------¦ ¦1947 ¦171 ¦22,982.79 ¦ +------+------------------+---------------¦ ¦1948 ¦164 ¦30,203.06 ¦ +------+------------------+---------------¦ ¦1949 ¦111 ¦19,496.25 ¦ +------+------------------+---------------¦ ¦1950 ¦252 ¦131,538.59 ¦ +------+------------------+---------------¦ ¦1951 ¦163 ¦95,418.23 ¦ +------+------------------+---------------¦ ¦ ¦973 ¦$334,397.03 ¦ +-----------------------------------------+ These sales were made to many different spring manufacturers in the United States. The wire could be used in making springs to be used in watches, automobiles, and other products.
At the end of 1951, there remained on hand about 200,000 pounds of wire.
The syndicate maintained books and records which consisted of a general journal, cash receipts book, cash disbursements book, sales journal, and a general ledger.
The syndicate operated from the premises and used the facilities of Simonsen Metal Products Company. All transactions involved herein were conducted in the name of Simonsen Metal Products Company using the letterheads, purchase orders, sales invoices, personnel, and warehouse space of Simonsen Metal Products Company. The syndicate did not maintain a bank account, but all receipts and disbursements were cleared through the account of Simonsen Metal Products Company. The syndicate reimbursed Simonsen Metal Products Company for these services.
The syndicate filed incomplete returns (Form 1065) for 1950 and 1951. Nothing was reported for gross receipts from sales, cost of goods sold, gross profit, and no expenses were reported such as salaries, wages or commissions, rent, or other expenses. The returns filed were blank excepting that part of Schedule A, gains and losses from sales or exchanges or property, line 3, was filled in as shown below; in Schedule K the names of the members of the syndicate and their shares of total long-term gain were listed; and in line 28, page 1, net long-term capital gain was reported in the amounts previously set forth above. Net long-term capital gain was reported in the returns as follows:
+--------------------------------------------------------+ ¦ ¦Gross sales ¦Cost or ¦Expense ¦Long-term ¦ +------+-------------+-------------+---------+-----------¦ ¦Year ¦price ¦other basis ¦of sale ¦gain ¦ +------+-------------+-------------+---------+-----------¦ ¦ ¦ ¦ ¦ ¦ ¦ +------+-------------+-------------+---------+-----------¦ ¦1950 ¦$131,538.59 ¦$39,611.45 ¦$5,041.28¦$86,885.86 ¦ +------+-------------+-------------+---------+-----------¦ ¦1951 ¦95,418.23 ¦16,109.77 ¦9,845.12 ¦69,463.34 ¦ +--------------------------------------------------------+
The music or piano wire was stock in trade of the syndicate and the stock on hand at the close of each taxable year was properly included in the syndicate's inventory. The wire was held primarily for sale to customers in the ordinary course of its business.
The stipulation of facts in incorporated herein by this reference.
OPINION.
HARRON, Judge:
The issue presented is whether gains realized in the taxable years 1950 and 1951 from the sales of wire by the Simonsen Wire Syndicate, of which petitioners were members are entitled to receive capital gains treatment, as petitioners contend, or are taxable as ordinary income under sections 22(a), 182(c), and 183(a), 1939 Code, as the Commissioner has determined.
The respondent contends that the merchandise which is in question, music wire or piano wire or both, is property which is excluded from the definition of capital assets set forth in section 117(a)(1)(A) of the 1939 Code,
for two reasons: First, because it was ‘property of a kind which would properly be included in inventory of the taxpayer if on hand at the close of the taxable year’; and second, because it was property held by the syndicate primarily for sale to customers in the ordinary course of business. Respondent cites Morris W. Zack, 25 T.C. 676, on appeal C.A. 6.
SEC. 117. CAPITAL GAINS AND LOSSES.(a) DEFINITIONS.— As used in this chapter—(1) CAPITAL ASSETS.— The term ‘capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include—(A) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
Petitioners contend that the syndicate held the merchandise ‘as a capital asset for disposition at a gain, if possible, and not as stock in trade properly inventoried and held primarily for sale to customers in the ordinary course of a trade or business.’ The cases cited by petitioners are set forth in the margin.
Cases cited by petitioners: Greenspon v. Commissioner, 229 F.2d 947; Ross v. Commissioner, 227 F.2d 265; Consolidated Naval Stores Company v. Fahs, 227 F.2d 923; Chandler v. United States, 226 F.2d 403; Smith v. Dunn, 224 F. 2d 353; Goldberg v. Commissioner, 223 F. 2d 709; Dillon v. Commissioner, 213 F.2d 218; McGah v. Commissioner, 210 F.2d 769; Victory Housing No. 2, Inc. v. Commissioner, 205 F.2d 371.
Except for making the assertion as set forth in the above quotation that the wire was not held ‘as stock in trade properly inventoried,‘ petitioners, on brief, present no argument on the question of whether the wire is ‘property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.’ Such property is specifically excluded from the statutory definition of capital assets by subsection (A) of section 117(a)(1), and if the merchandise which is involved under the issue before us is property of a kind which would be properly included in inventory, petitioners must fail at the outset.
‘In order that the petitioners may take advantage of the capital asset basis of taxation established by section 117, the merchandise in question must not come within the classes of property specifically excluded therefrom the the statute.’ Harry Dunitz, 7 T.C. 672, 684, affd. 167 F.2d 223. Also, the Commissioner having determined that the merchandise was not a capital asset, the petitioners have the burden of overcoming the prima facie correctness of the Commissioner's determination. Their burden of proof under the issue presented requires proving that the merchandise does not come within a class of property specifically excluded from capital assets in the statutory definition.
The petitioners decided not to call the accountant for the syndicate during the trial of these cases although he was present during the trial. They have not made any effort to establish that the music wire was not property of a kind which would properly be included in the inventory of the syndicate if on hand at the close of the taxable year. The syndicate had music wire on hand at the end of each of the years 1946 through 1951. During the trial, counsel for petitioners recognized that at the end of each year it was necessary to determine how much wire was left at the end of the year ‘because otherwise you could not determine what you sold in terms of inventory.’ Furthermore, the parties have stipulated that, ‘The Syndicate determined its gross profit from sales in each of the years 1946 to 1951, inclusive, by use of inventories. * * * A statement of the inventory reported at December 31, 1949, is typical of the inventories involved * * *.’ The evidence shows (Exhibit 13-M) a typical inventory of the syndicate of different sizes on hand, cost per pound, and value. In the income tax return of the syndicate for 1949, the return was prepared on an accrual and on an inventory basis, and the syndicate valued its inventory at cost or market, whichever was lower. On the record before us, we must and do find that the wire was stock in trade of the syndicate and that the stock on hand at the close of each year was properly included in the syndicate's inventory.
It is clear that beginning with the year 1946, through 1949, the syndicate reported income by use of the inventory method; it computed the cost of goods sold and gross profit from sales in each year by the use of inventories. It adopted a method of accounting which involved the use of inventories.
In its returns for 1950 and 1951, however, the syndicate did not show how it computed its gross profit from sales in each year. The returns for 1950 and 1951 are almost blank returns in which, on page 1, every line is blank except line 28, ‘net long-term capital gain (or loss),‘ on which line net long-term capital gain was reported, $86,885.86 for 1950, and $69,463.34 for 1951. However, the petitioners, by their stipulation, above quoted, admit that the syndicate determined gross profits from sales in 1950 and 1951 by use of inventories. They do not contend that they changed their method of accounting for 1950 and 1951. If they wished to do so, they would have to obtain the consent of the Commissioner. See Regs. 111, sec. 29.41-2; Pacific Vegetable Oil Corporation, 26 T.C. 1. The returns filed by the syndicate for 1950 and 1951 are obviously incomplete returns through which the syndicate made an attempt to obtain capital gains treatment for the gains realized in those years which were, incidentally, the first years in which gains were realized; losses were sustained in each of the years 1946 through 1949.
Since the merchandise in question was property of the syndicate which was properly included in its inventory, the merchandise in question comes within the scope of one of the statutory exceptions to the definition of capital assets.
The above conclusion disposes of the issue in respondent's favor. But we also conclude that the wire was held by the syndicate primarily for sale to its customers in the ordinary course of its business.
The syndicate was organized for the purpose of marketing music wire. Each member of the syndicate contributed funds to purchase the merchandise. In 1946, it purchased 57 different lots of wire in 37 different sizes. The wire was acquired with the sole and exclusive purpose of reselling it as soon as possible. The wire did not come to the syndicate as a capital asset. Cf. Louis Greenspon v. Commissioner, 229 F.2d 947, reversing in part 23 T.C. 138. The wire was sold to many different purchasers and there were 973 separate sales during the years 1946 to 1951, inclusive; there were 252 sales in 1950 and 163 sales in 1951. Total sales in 1950 and 1951 were in the amounts of $131,538.59 and $95,418.23, respectively.
The returns of the syndicate for 1946 to 1949, inclusive, show the operation of a business as a wire jobber, and the losses were reported as ordinary losses from the operation of a business. The syndicate maintained a set of ordinary business books, and the only business functions it did not perform were carried on for it by Simonsen Metal Products Company which was paid for such services.
The syndicate had no business other than the purchase and sale of the wire, and it paid salaries and wages, rent, sales expenses, insurance, and other expenses. To the extent that there are facts in the record, it is clear that there was sales activity. The wire could not sell itself. On the point of sales activity there is almost no evidence other than the facts about numbers and amounts of sales. Failure of proof is involved here. We cannot hold on the evidence before us that the wire was ever held passively.
The entire record in this proceeding establishes that the syndicate operated in the typical manner of a business. The wire was purchased with the sole purpose of reselling it as soon as possible. There was frequency and continuity of sales. Sales transactions were in excess of 100 sales a year, for 6 consecutive years. There was, as far as the record shows, all of the normal sales activity of any business, and disposal of the merchandise involved necessarily required sales activity in order to close 973 different sales to a long list of purchasers.
It is held that Simonsen Wire Syndicate held wire primarily for sale to customers in the ordinary course of its business; the wire, therefore, is not a capital asset. Sec. 117(a)(1)(A); Morris W. Zack, supra; J. Roland Brady, 25 T.C. 682.
Ordinary income of the syndicate is ordinary income of the members of the syndicate. Secs. 182(c) and 183(a), 1939 Code. Morris W. Zack, supra.
The cases cited by petitioners are not controlling. On their respective facts they are distinguishable.
Decisions will be entered for the respondent.