Bay Poplar Lumber Co. v. Commissioner

*1367 The Commissioner determined a deficiency of $2,805.16 in income and profits tax for the calendar year 1920.

The issue is whether the petitioner is entitled to have its profits tax determined under section 328 of the Revenue Act of 1918.

*1368 FINDINGS OF FACT.

Petitioner, an Ohio corporation, was organized in 1907 for the manufacture of cigar box lumber from what is known as tupelo gum or whitewood.

Prior to the organization of petitioner, the Frank Unnewehr Co. was engaged in the manufacture of cigar boxes and cigar box lumber, this company being a client of the law firm of which one Alfred M. Cohen was a member. As a result of representations made by persons connected with the Frank Unnewehr Co., Cohen was induced to organize the petitioner company to conduct a similar business, *3358 the stockholders of the Frank Unnewehr Co. taking stock in the new company.

It was represented that the new company could probably sell its product to persons or concerns that were customers of the Frank Unnewehr Co. with little expense and difficulty, and this turned out to be the fact, the selling cost for several years being only $2,000 a year, which amount was paid to William J. Afsprung, formerly connected with the Frank Unnewehr Co. The stock of petitioner was owned by Cohen, members of his family, Alfred Mack, Leon B. Gilbert, and William J. Afsprung. When Cohen became president of petitioner company in 1915, the stockholders of this company acquired the stock of the Frank Unnewehr Co.

No charges of a general nature for any legal services were made by Cohen's law firm for 1920, nor for any other years. In the beginning this law firm rendered such legal services as were necessary in connection with the organization of petitioner company and subsequently it has rendered such legal services as are ordinarily required by such business concerns when in operation.

In addition to being president of petitioner, Cohen was engaged in active law practice and was president of*3359 the Peoples Bank & Savings Co., but gave considerable time to the business of petitioner, going twice a year to petitioner's plant in Mobile, Alabama, and remaining there about ten days each time seeing, while there, to the making of contracts for the purchase of adequate lumber supplies.

The company used as an office one of the rooms of the firm of lawyers of which the president was a member, but no rent was charged or paid therefor. No fees for legal services, stenographic bills or rent were paid by petitioner.

The secretary, Alfred Mack, was also a lawyer and his time in 1920 was in the main devoted to his law business. Elias H. Phillips, the vice precident, was a jeweler, carrying on such business in partnership with his brother. Godfrey J. Phillips, the treasurer, had charge of the larger books and finances of the company. No separate office force was maintained for petitioner. Except for such matters *1369 as required immediate attention, the officers of petitioner devoted their time during the day to their regular business. If some matter required advice of directors, one or more would be called to meet with the president at night. The salaries paid from*3360 1918 to and including 1920 (none were paid before that date) were Alfred M. Cohen, president, $4,500; Alfred Mack, secretary, $1,400; Elias H. Phillips, vice president, $1,000; and Godfrey J. Phillips, treasurer, $3,400.

At the beginning of 1920 petitioner owed the Peoples Bank & Savings Co. of Cincinnati, Ohio, $38,000. For the purpose of meeting its current obligations and carrying on its business, petitioner borrowed of said institution during 1920, $81,000. It repaid to the same bank during the first nine months of 1920, $113,000, leaving a balance of $6,000 due at the end of the year.

At the beginning of the same year petitioner also owed Phillips Brothers $4,000, borrowed money, and during the year borrowed an additional $25,000 for the purpose of meeting various obligations, paying loans, making purchases, etc. During January, February, and March of the same year, petitioner repaid $26,000, leaving a balance of $3,000 due said firm. No notes were given for the money so borrowed, but 6 per cent interest was paid on both loans.

November 16, 1917, petitioner purchased about 2,000,000 feet of standing timber at the average price of $4 a thousand, the contract of sale*3361 calling for a cash payment of $8,226 on delivery of said contract, the petitioner to have three years, or until November 16, 1920, to remove said timber.

In 1920, the market price of such standing timber was about $10 a thousand feet.

The gross sales of petitioner for 1917 to 1922, inclusive, were as follows:

Petitioner paid nothing for whatever benefit accrued to it at the time of its organization or afterwards by reason of its ability to sell its product to customers formerly patronizing the Frank Unnewehr Co., certain of the business of which came to the new company.

OPINION.

LITTLETON: Petitioner bases its claim for assessment of its profits tax under section 328 of the Revenue Act of 1918 upon the ground that there were abnormal conditions affecting its capital and income during 1920 and relies upon the fact that its gross sales in 1920 were much larger than they were in certain prior and subsequent years; *1370 the salaries of its officers were moderate and that none were paid prior to 1918; that the cost of selling its product was*3362 small and easily affected and that such conditions had existed for several years, though results prior to 1920 had not been so satisfactory.

The evidence is not sufficient to warrant the Board in holding that there existed in 1920 such abnormal conditions as would entitle petitioner to a computation of its profits tax under section 328 of the Revenue Act of 1918.

All of the officers of petitioner had and attended to other business than that of petitioner, and there is nothing to indicate that the salaries paid were not adequate, that these officers could have obtained more elsewhere for the same services or that others, equally effective, could not have been obtained for the same salary. .

The fact that gross sales in 1920 were larger than those in prior and subsequent years does not establish an abnormality in the income. We do not know what the net income or invested capital was during 1920. The provisions of the special assessment sections of the statute do not apply when the tax, computed without the benefit of those sections, is high merely because the corporation earned within the year a higher rate of profit. *3363 Petitioner has not sustained the burden of proof of showing error in the Commissioner's refusal to compute its profits tax under the special assessment provisions of the statute.

Judgment will be entered for the respondent.