Summary
In Stafford Owners, Inc., v. United States, 39 F.2d 743, 745, 69 Ct.Cl. 475, a case involving a corporation stock tax on a cooperative apartment, it was held that the corporation "holds the legal title to the premises for the convenience of the stockholders, each of whom has an equitable and beneficial ownership of all the apartments in the building."
Summary of this case from Glennon v. ButlerOpinion
No. K-101.
April 7, 1930.
Action by the Stafford Owners, Inc., against the United States.
Judgment for plaintiff.
This is a tax case in which recovery is sought of $450, with interest, assessed on the ground that plaintiff is a domestic corporation carrying on or doing business.
The court, upon the report of a commissioner, makes the following special findings of fact:
(1) Plaintiff is, and was at all times hereinafter mentioned, a corporation duly organized and existing under and by virtue of the laws of the state of Delaware, having been organized as such in July, 1920. It holds, and has held since 1921, the legal title to the co-operative apartment house at 1789 Lanier Place N.W., Washington, D.C., known as "The Stafford."
(2) Plaintiff is now, and was at all times hereinafter mentioned, a co-operative home owners' corporation for the convenience of its members only, and is not now, and never has been, operated for pecuniary gain or profit.
(3) On or about April 19, 1926, the Commissioner of Internal Revenue assessed against plaintiff, as and for capital stock taxes, the sum of $450 as follows:
Fiscal year ending June 30, 1922 ... $89.00 " " " June 30, 1923 ... 90.00 " " " June 30, 1924 ... 90.00 " " " June 30, 1925 ... 91.00 " " " June 30, 1926 ... 90.00 _______ Total ........................... $450.00
4. On or about April 26, 1926, plaintiff paid to the collector of internal revenue in Baltimore, Md., in compliance with his demands, the sum of $450 assessed as aforesaid, and the said collector of internal revenue covered the said payment into the Treasury of the United States.
(5) Plaintiff's sole activities consist in holding the legal title to and handling the details of management of said apartment house, containing sixteen apartments, known as "The Stafford." It holds said title merely for the convenience of the tenants thereof, who are its sole stockholders, and who have the equitable and beneficial ownership of all the apartments in said apartment house. It does not rent out any apartments in said apartment house and/or derive any gain or profit therefrom. All the apartments in said building are occupied by the owners thereof, except one, and the excepted one is rented by the owner to his own tenant, and the rent is paid by the tenant to the owner of the apartment — not to the plaintiff.
(6) Plaintiff is operated as a convenient means for sixteen home owners, who are its sole stockholders, to manage their apartments. Its affairs are administered through a board of directors and officers chosen from among the stockholder tenants and who serve without compensation. The only salaries paid by the plaintiff are to the janitor and house manager. Its expenses are paid out of assessments, levied monthly, on each stockholder, sufficient only to cover his pro rata share of the cost of janitor service, management, light, heat, repairs, water, insurance, taxes, interest, amortization of mortgages, etc. There is no profit or loss, in the usual business sense, involved in these operations. Plaintiff has no income from any source other than said assessments against its stockholders, except a small amount of interest on its bank deposits, all of which is paid out as aforesaid, and none of which is distributed or distributable to its stockholders.
(7) Plaintiff has an authorized capital stock of $95,250, which has been completely subscribed by the owners of the sixteen apartments in "The Stafford." Subscriptions to said stock are necessary to purchase apartments in the building, and each stockholder tenant subscribes to the amount of stock equivalent to the cost of his apartment. Said stock is nonnegotiable and nonmarketable, except with the sale of an apartment, and has no earning power or loan value, and has never paid a dividend. The total capital stock of the corporation represents the purchase price of "The Stafford" in 1921, against which there were liens during the years 1921 to 1926, inclusive, in the form of first and second trusts ranging from $56,400 in 1921 to $38,250 in 1926. Plaintiff has no undivided profits or surplus or good will or valuable franchises, and the only property owned by it is "The Stafford," to which it holds only the bare legal title, and which cannot be sold except with the unanimous consent of the stockholders.
(8) "The Stafford" is appraised for local taxation at $77,000, and is insured for the amount of $80,000. Plaintiff's ownership of the same is subject to the liens of all the stockholder tenants who own all the apartments in the building. The combined values of all the apartments equal the total cost and market value of the entire building, and no market value can be ascribed to plaintiff's ownership of the title to the building.
(9) Plaintiff can never, under its by-laws and mode of operation, earn any profits or accumulate any surplus or undivided profits, or sell any of its stock except in connection with the sale of an apartment, nor would any one be permitted to buy any of plaintiff's capital stock except in connection with the purchase of an apartment in the building.
(10) On or about June 20, 1928, plaintiff filed with the collector of internal revenue in Baltimore, Md., claims for refund of the taxes assessed and collected as aforesaid, on the grounds that plaintiff was not "carrying on or doing business," and that its capital stock has no "fair average value." On September 11, 1928, the Commissioner of Internal Revenue rejected said claims.
(11) No action has been taken on this claim other than herein set forth, before Congress or any department of the government, or in any court. No person, other than the plaintiff, is the owner thereof or interested therein. No assignment or transfer of this claim or any part thereof or interest therein has been made. Plaintiff has not, in any way, voluntarily aided, abetted, or given encouragement to rebellion against the government of the United States.
Chester A. Gwinn, of Washington, D.C. (Humphreys Gwinn, of Washington, D.C., on the brief), for plaintiff.
Arthur J. Iles, of Indianapolis, Ind., and Charles F. Kincheloe, of Washington, D.C., for the United States.
Argued before BOOTH, Chief Justice, and WILLIAMS, LITTLETON, GREEN, and GRAHAM, Judges.
The Commissioner of Internal Revenue assessed against and collected from the plaintiff a capital stock tax of $450. A refund claim seasonably filed was denied, and this suit is to recover the tax paid, with interest thereon. No jurisdictional issue is involved.
The Revenue Act of 1921 ( 42 Stat. 227, 294) contains the following provisions:
"Sec. 1000(a). That on and after July 1, 1922, in lieu of the tax imposed by section 1000 of the Revenue Act of 1918 —
"(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."
Section 700(a) of the Revenue Act of 1924 ( 43 Stat. 325, 26 USCA 223 note) is substantially the same.
The plaintiff was incorporated under the laws of Delaware in July, 1920. Since 1921 it has held the legal title to a co-operative apartment house at 1789 Lanier Place N.W., in Washington, D.C. The activities of the corporation are confined to a single purpose. The authorized capital stock of $95,250 is owned proportionately by sixteen apartment tenants, having been subscribed for by them on the basis of the ultimate purchase price of each individual's apartment; the enterprise itself being exclusively directed towards the purchase and ownership of an apartment, rather than the payment of a fixed rental for occupancy. The stock is nonnegotiable and nonmarketable; it possesses no earning power or loan value, and has never paid a dividend. The plaintiff holds the legal title to the premises for the convenience of the stockholders, each of whom has an equitable and beneficial ownership of all the apartments in the building. A person wishing to purchase an apartment in the building subscribes for the amount of stock representing the purchase price of the apartment chosen. If subsequently for any cause such a purchaser desires to sell his interest in the apartment purchased, it may be done by the assignment of the stock. A stock subscriber may also rent his apartment; the rent being paid to and received by the owner and not the corporation. A monthly assessment is laid against each stockholder sufficient in amount to discharge his pro rata obligation of the cost of janitor service, management, light, heat, repairs, water, insurance, taxes, interest, and amortization of mortgages. The corporation derives no substantial profit save an inconsequential amount of interest on bank deposits, and has no income from any source other than as above set forth. Its affairs, of course, are administered by a board of directors chosen by the stockholders, and its only salaried employees are the house manager and the janitor.
The apartment owned is known as "The Stafford." It was purchased in 1921; the issued capital stock representing the purchase price. The first and second trusts on the building have been gradually reduced from $56,400 in 1921 to $38,250 in 1926. From a monetary standpoint it is evident that the corporation plaintiff will not accumulate a surplus or undivided profits, and is absolutely precluded from offering capital stock to other than home seekers. In fact, the findings show that the corporate entity is nothing more than an adopted means to accomplish a co-operative purpose, which enables prospective purchasers to acquire a home by the payment of stated installments upon the purchase price, rather than monthly rent for an apartment. It would seem to be without question the very character of a domestic corporation intended as exempt under the statute, in virtue of the law's provision taxing only domestic corporations "carrying on or doing business."
The statute involved has been many times before the courts. Without doubt each case is determinable from its own peculiar facts. In Edwards v. Chile Copper Co., 270 U.S. 452, 46 S. Ct. 345, 70 L. Ed. 678, and Von Baumbach v. Sargent Land Co., 242 U.S. 503, 37 S. Ct. 201, 61 L. Ed. 460, the Supreme Court construed the applicable provisions of the Revenue Act. The tax as therein held is an excise tax placed upon the privilege of incorporating. The language of the law indicates clearly the class to be subjected to the tax, and the question as to what is and what is not "carrying on or doing business" must be resolved from what the corporation actually does in the ordinary acceptation of those terms.
It is true, as the defendant insists, that the means adopted by the stockholders of the plaintiff corporation results in advantages to them. It does enable them to acquire by a gradual outlay an apartment; it serves to minimize expense in management, and probably results in the end in the purchase of a greater amount of space than it would otherwise cost them. However, may it be said that economical results co-operatively obtained, not by earnings but by savings, constitute business activities in the sense of the statute? In this case the single activity of the plaintiff is not to profit as an entity; the possibility of so doing is foreclosed to it. The entire conception of the organization is economical management, restricted to the single purpose of eventually owning the building, free from liens so that the stockholders may own their own apartments free from rent and the possibility of eviction. The case of the Edgar Estates Corporation v. United States, 65 Ct. Cl. 415, is not precisely in point. In that case the corporate activities were distinctly for a monetary profit to be accomplished by the judicious administration of various kinds of property, some of which exacted wise judgment as to investment and others to be made available for immediate sale, under circumstances when the same could not be accomplished by the individual owners as tenants in common. In the end, profits in the Edgar Estates Corporation were to accrue, i.e., money profits, to the stockholders. In this case the object of incorporation is not similar. On the contrary, the essence of the purpose is to avoid the earning of profits in a monetary sense and by an adopted method utilize the partial payments in the liquidation of incurred indebtedness, so that in the end the various stockholders may eventually own the building and their individual apartments. No part of the money exacted from the sixteen individuals interested goes to enrich cotenants. Each stockholder pays the full purchase price for his apartment, and the incentive for incorporation is to own a place to live, not to acquire income from a going concern organized on the basis of earning dividends for distribution to its stockholders.
We think the plaintiff is entitled to recover. Judgment for plaintiff for $450, with interest. It is so ordered.