L. H. Philo Corp. v. Commissioner

*153 The Commissioner determined deficiencies in income tax for the fiscal years ended November 30, 1926 and 1927, in the amounts of $1,089.13 and $854.91, respectively.

The only error assigned is: "The Commissioner of Internal Revenue has erroneously reduced the petitioner's deduction from gross income for the depreciation sustained during the fiscal years 1926 and 1927 by computing depreciation on an incorrect value as at the date of organization." No question as to the rate of depreciation is raised.

FINDINGS OF FACT.

The petitioner is a corporation of the State of New York, with its principal office in the city of New York.

On December 1, 1919, it took over the assets and liabilities of Philo-Selby Company, a partnership, which had been engaged in the business*1916 of lithographing, steel-plate printing, steel-die embossing, typeprinting, etc., and had been owned by L. H. Philo and Archibald M. Selby in the proportion of four-ninths and five-ninths interests, respectively.

*154 The journal voucher or register of petitioner contains the following statement:

In consideration of the entire authorized capital stock of the L. H. Philo Corp. consisting of 800 shares of 100.00 each (80000.00) L. H. Philo transfers the ownership of the business of Philo-Selby Co. to L. H. Philo Corp. consisting of the above values.

Under date of December 1, 1919, opening entries were made in the journal register of petitioner. This shows a debit entry of $129,729.49. The following credits were listed:

Included in the debits were depreciable assets of the value of $70,348.82, the value of other assets being $59,380.67.

There is in evidence what on its face purports to be a "Bill of Sale and Agreement" from Philo-Selby Company to L. H. Philo Corporation, which instrument was duly signed and acknowledged by petitioner, *1917 "by L. H. Philo, President," and also by Archibald M. Selby and L. H. Philo, on December 1, 1919.

In said instrument it is in substance recited that Philo and Selby have bargained, sold, assigned, transferred and delivered to the L. H. Philo Corporation all right, title and interest in the firm of Philo-Selby Company and the partners therein agreed to execute and deliver all such further bills of sale and other instruments that may be required to vest title in the petitioner, who assumed all contracts of the partners of every kind made by them in connection with the carrying on of the business of the firm, including all debts, etc., and the petitioner agreed therein that the use of the name of Archibald M. Selby in connection with the business thereby transferred should come to an end within sixty days, except that in the matter of watermarks and imprints his name should be eliminated as soon as practicable in all goods manufactured by petitioner, in consideration of which Selby agreed not to engage in or become associated with any firm or corporation carrying on a business of the same kind as had the Philo-Selby Company within fifteen years after December 1, 1919, within certain*1918 States, nor within five years in certain other States.

After the acquisition of the assets of the Philo-Selby Company by the petitioner, L. H. Philo immediately became the owner of all the stock of petitioner corporation.

The evidence does not disclose when the dissolution of the partnership between Philo and Selby occurred. Neither testified in the case *155 nor is any explanation offered in evidence, other than what may be surmised from the foregoing, as to when, how and for what consideration Selby so parted with his five-ninths interest in the Philo-Selby Company partnership as to entitle and clothe Philo with the right and title to all petitioner's stock.

OPINION.

SEAWELL: It is contended in behalf of petitioner that the facts of the case are not such as to make it subject to the provisions of section 204(a)(7) and (c) of the Revenue Acts of 1924 and 1926, for the reason that L. H. Philo owned only four-ninths interest in the partnership of Philo-Selby Company and immediately after the acquisition of the assets of said partnership by the L. H. Philo Corporation he owned the entire stock of said corporation, and did not occupy the position of a person in whom*1919 an interest or control of 80 per centum or more "remained" as contemplated by the statute.

It is further insisted in behalf of the petitioner that the transfer to it of the assets formerly owned by the partnership was by both Philo and Selby, although the consideration therefor, the entire stock of petitioner, was immediately thereafter received and owned by Philo. It is also argued that the statute requires a continuity of interest from the transferor to petitioner corporation, which did not exist in the instant case.

In behalf of the respondent it is contended that the statute above mentioned is applicable and that it makes no difference whether the partnership assets were transferred to the petitioner for its capital stock by Philo and Selby, constituting the partnership of Philo-Selby Company, or by Philo alone after acquiring the interest of Selby therein, since one of the same persons making the transfer immediately thereafter became the owner of the stock of the petitioner and more than an 80 per centum interest therein continued with or remained in him, Philo.

This same corporation has heretofore been before us for a redetermination of deficiencies in income and*1920 excess-profits taxes for prior fiscal years and our decision thereon is reported in . In that case we found that the evidence indicated that Philo intended buying the interest of Selby in their partnership and that he in fact did so and, as indicated by the evidence in the instant case, turned over all the assets formerly owned by the partnership to the petitioner for its entire authorized capital stock, of which he became sole owner.

The respondent has continued to consider and treat the transfer of assets to petitioner as having been made by Philo, as the journal *156 entries on petitioner's records indicate and as we before, on the evidence then submitted, found, and in the absence of evidence other than the "Bill of Sale and Agreement" herein mentioned in our findings of fact, and which affords no explanation of how Philo became entitled to immediate ownership of all the stock of the petitioner, upon the acquisition of the firm assets of Philo-Selby Company, by the petitioner, except on the theory that he had in fact in some way previously acquired Selby's partnership interest, we are of the opinion that the presumption of the correctness of*1921 respondent's determination has not been overcome.

In view of such conclusion, there is no occasion for discussing the question of "continuity of interest" suggested, nor authorities cited, by petitioner's counsel.

The evidence indicates Philo bought or acquired Selby's partnership interest prior to the acquisition of the partnership assets by petitioner and, in such event, no doubt as to "continuity of interest" or as to there remaining with Philo an interest in said property of 80 per centum or more could arise and the determination of the respondent is approved.

Judgment will be entered for the respondent.