Opinion
Docket No. 9574.
1947-03-26
HOME GUARANTY ABSTRACT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
A. E. Brooks, Esq., and Thorp A. Andrews, Esq., for the petitioner. Stanley B. Anderson, Esq., for the respondent.
Petitioner, an abstract company, was incorporated in 1902, and $15,000 was paid in for stock. About $20,000 was expended, up to 1914, upon records. In 1920 an amendment to charter was filed, raising stock to $40,000, based upon a $25,000 increase in value of assets. Offer to sell for $25,000 cash and $25,000 stock in a new company to be formed, was made in 1921. In 1944 the stock was sold for $60,000. The corporation Aid dues to clubs for its officers, and from one club definite business was acquired. The purpose of the officers in joining the clubs was not shown. The petitioner filed its excess profits tax return out of time, believing that it owed no such tax, and leaving the return to its auditor to file. Held, only $15,000, in addition to accumulated earnings and profits at the beginning of the respective years allowed by the deficiency notice, should be included in computing equity invested capital; held, further, club dues not allowed as deductions; held, further, no error in addition of penalty for failure to file timely return. A. E. Brooks, Esq., and Thorp A. Andrews, Esq., for the petitioner. Stanley B. Anderson, Esq., for the respondent.
In this case there are involved deficiencies determined as follows:
+----------------------------------------------------+ ¦ ¦ ¦Declared ¦ ¦ ¦ +----+----------+------------+---------+-------------¦ ¦ ¦ ¦value excess¦ ¦ ¦ +----+----------+------------+-----------------------¦ ¦Year¦Income tax¦profits tax ¦Excess profits tax ¦ +----+----------+------------+-----------------------¦ ¦ ¦ ¦ ¦ ¦25% penalty ¦ +----+----------+------------------------------------¦ ¦1941¦$145.94 ¦ ¦ +----+----------+------------------------------------¦ ¦1942¦142.41 ¦$118.49 ¦$1,271.82¦$317.96 ¦ +----+----------+------------+---------+-------------¦ ¦1943¦ ¦65.11 ¦4,293.79 ¦ ¦ +----------------------------------------------------+
The questions presented for our determination are: (1) Whether petitioner is entitled to include $40,000, as equity invested capital, in determining excess profits; (2) whether it is entitled to deduction of certain club dues as business expense; and (3) whether it is liable for a delinquency penalty for failure to file a timely excess profits tax return for 1942. From evidence adduced and brief partial stipulation of facts, we make the following findings of fact.
FINDINGS OF FACT.
The petitioner was incorporated under the law of Texas in 1902, as ‘Guaranty Abstract & Title Company,‘ its name being changed about 1940 to ‘Home Guaranty Abstract Company‘ by charter amendment. its business is that of an abstract company, and its business address is Forth Worth, Texas. It filed the Federal tax returns here in question with the collector for the second district of Texas, at Dallas, Texas. At incorporation the authorized capital stock was $15,000, of which $1,500 was paid in at that time. The incorporators were John Tarlton, B. D. Tarlton, and Leroy Smith. John Tarlton managed the business from the beginning. Between 1902 and 1906 the entire $15,000 in stock was paid in. Leroy Smith paid in $5,000; Tarlton & Ayres, a law firm, put in $5,000; E. S. Kuykendall, $1,500; Robert Dunham, $2,500; and A. G. Johnson, $1,000. John Tarlton had nothing to pay in, but had a salary of $125 a month, of which he took down $50 for four or five years, leaving $75 to go to pay on stock. After the company was incorporated in 1902, it kept books showing the amount of stock subscribed, the names of stockholders, and the amounts paid.
The company bought from Texas Title Co. some abstract books, paying $3,100 cash. It also bought cabinets and furniture for about $1,000, and other books for about $1,000 from Texas Printing Co.; also a mimeograph machine and 3 or 4 typewriters, all costing approximately $500. The abstract books and records had been brought down to about 1900, and the petitioner made card indexes from the official filings for the period after 1900 and until about 1914. The filings indexed represented in all approximately 500 book records. It cost about $20 a book to compile such volumes. The company paid an employee $100 a month to do that work for about 5 or 6 years. Petitioner also compiled 105 impression books at a cost of about $100 each. The total cost of compiling the abstract indexes and records above described from 1902 to 1913, inclusive, was $20,000. The funds used came partly from the funds the stockholders paid in and partly from the company's revenues. For 4 or 5 years there were no profits. Later there was some profit.
In 1914 all of the petitioner's stock was sold to Cattlemen's Trust Co., and its assets and its stock books and records were delivered to the purchaser. In 1920 the stock was reacquired by the petitioner's stockholders, but the stock books and books of account of the company could not be located. The Cattlemen's Trust Co. had gone into the hands of a receiver, and he had possession of the books of account. John Tarlton had continued as manager for Cattlemen's Trust Co., but another employee had done the bookkeeping from 1914 to 1920.
On November 1, 1920, petitioner's charter was amended to increase capital stock from $15,000 to $40,000. An affidavit attached to the charter amendment recites stock subscriptions totaling $25,000, explained as follows:
* * * By the increase in the Abstract books, Abstract records, and the properties of the Guaranty Abstract & Title Co. and the value thereof from $15,000.00, which was its value at the date of its incorporation, to $40,000.00 at the present time. Another affidavit attached lists assets of the corporation totaling $54,000, consisting of cash in bank and accounts receivable, $4,000; office furniture and fixtures, $2,000; stock of stationery, blank books, etc., on hand, $1,000; maps and plats, $500; 216 impression books, $21,500; 15 survey, tract, and city books, $5,000; abstracts of title on hand, $10,000; and index cards, $10,000.
On March 1, 1921, the stockholders authorized and there was made an offer to sell all of the assets of the company, except cash on hand and accounts outstanding, for $50,000, $25,000 to be paid in cash and $25,000 in stock of a company to be organized as a title insurance company. An option of 90 days was given for the purchase and consummation of the deal. The petitioner continued to own the property until 1944, when the stock of the company was sold for $60,000 to the Dallas Title & Guaranty Co. John Tarlton was manager from 1902 to 1943.
The petitioner paid club dues to the Kiwanis Club, Rotary Club, and Fort Worth Club, because of membership therein by its officers. Business was received by the petitioner because of the connection with the Kiwanis club.
An excess profits tax return was filed by the petitioner on June 19, 1944, for the year 1942. An income tax return for the year 1942 was filed on March 13, 1943, showing normal tax net income of $4,843.13. The petitioner's auditor attended to the filings. He had charge of petitioner's books and the petitioner depended upon him to make all the reports to the Government.
The accumulated earnings and profits at the beginning of the year 1942 were $4,776.89, and the accumulated earnings and profits at the beginning of the year 1943 were $6,785.50.
The net income for the base years was as follows:
+--------------+ ¦1936¦$537.78 ¦ +----+---------¦ ¦1937¦456.76 ¦ +----+---------¦ ¦1938¦709.92 ¦ +----+---------¦ ¦1939¦1,045.45 ¦ +--------------+
Excess profits credit based on income is $993.18.
The average earnings during the base period were below the average earnings from the years 1920 to 1930, and for the period 1940 to 1943.
OPINION.
DISNEY, Judge:
Under the above facts, it is the petitioner's contention that its equity invested capital (for the purpose of determining the excess profits taxes herein involved) was on January 1, 1942, $44,776.89, representing $40,000 capital stock and $4,776.89 earnings and profits accumulated on that date; and that on January 1, 1943, the figure was $46,785.50, representing accumulated earnings and profits of $6,785.50 and the $40,000 capital stock.
In the alternative, petitioner contends the equity invested capital for 1942 was not less than $32,876.89, and for 1943, $33,885.50, representing amounts invested prior to 1913 in permanent records, cabinets, furniture, and equipment, all in the amount of $28,100, to be added to the accumulated earnings and profits of $4,776.89 on January 1, 1942, and $6,785.50 on January 1, 1943. Petitioner also says that excess profits tax credit based on income is $993.18, and the parties stipulate that amount as proper, and the petitioner entitled thereto, if that amount exceeds excess profits credit as determined by the Commissioner. The petitioner, as to the delinquency penalty, contends that there was not neglect, and that it acted in good faith, with reasonable cause, hence should not pay a penalty.
We have found as a fact that the original capital of $15,000 was paid in. The respondent argues, in effect, that the evidence on the point is inconclusive and not positive, and the criticism is not altogether without foundation, but the evidence was positive in figures and was not contradicted, and we are convinced that, taken as a whole, it represents the factual situation, and that the $15,000 original capital stock, together with the amounts of accumulated earnings and profits, should be reflected in the excess profits tax credits for the two years involved.
This leaves for consideration whether credit should also be based on $25,000 as addition to capital stock at the time of amendment of charter in 1920. In our opinion it should not. The statute here involved is section 718(a)(1), (2), and (4), of the Internal Revenue Code.
Thereunder, equity invested capital must be either money or property paid in, so far as just here concerned. The money originally paid in, $15,000, for stock, we have above considered as within the statute. The affidavit attached to the charter amendment shows on its fact that the $25,000 ‘subscriptions were paid as follows: By the increase in the Abstract books, abstract records, and the properties * * * and the value thereof from $15,000.00, which was its value at the date of its incorporation, to $40,000 at the present time.” The petitioner cites no authority, and we discover none, basing equity invested capital upon mere increase in value of the original investment. In LaBelle Iron Works v. United States, 256 U.S. 377, the Supreme Court, construing the Revenue Act of October 3, 1917, Title 2, section 207, relating to excess profits tax, held that ‘invested capital‘ did not include appreciation in value of property after acquisition. Though the statute is not the same in text as that here involved, we think the same principle applies here. We hold that any such mere appreciation in value does not demonstrate equity invested capital. The same is true of evidence as to offer to sell for $25,000 cash and $25,000 stock in 1921, and sale for $60,000 in 1944. Not only does the offer to sell in 1920 establish nothing of evidential value, particularly considering the fact that $25,000 was to be paid in stock of a proposed company, but, as to both that offer and the actual sale in 1944, it is apparent, and we hold, that sale prices do not represent investment.
SEC. 718. EQUITY INVESTED CAPITAL.(a) DEFINITION.— The equity invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following amounts, reduced as provided in subsection (b)—(1) MONEY PAID IN.— Money previously paid in for stock, or as paid-in surplus, or as a contribution to capital;(2) PROPERTY PAID IN.— Property (other than money) previously paid in (regardless of the time paid in) for stock, or as paid-in surplus, or as a contribution to capital. Such property shall be included in an amount equal to its bases (unadjusted) for determining loss upon sale or exchange. If the property was disposed of before such taxable year, such basis shall be determined under the law applicable to the year of disposition, but without regard to the value of the property as of March 1, 1913. If the property was disposed of before March 1, 1913, its basis shall be considered to be its fair market value at the time paid in. If the unadjusted basis of the property is a substituted basis, such basis shall be adjusted, with respect to the period before the property was paid in, by an amount equal to the adjustments proper under section 115(1) for determining earnings and profits.* * *(4) EARNINGS AND PROFITS AT BEGINNINGS OF YEAR.— The accumulated earnings and profits as of the beginning of such taxable year.
The petitioner suggests that the addition of books, records, card indexes, and equipment purchases, or developed at considerable expense after 1902 and prior to 1913, represents capital. But accumulated earnings and profits to be included are those at the beginning of the year involved, and these have been stipulated, and were allowed in the computation of deficiency. Nothing in the statute indicates that the language, ‘the accumulated earnings and profits as of the beginning of such taxable year,‘ does not encompass earnings and profits accumulated prior to 1913. The simple stipulation presented to us here, and incorporated verbatim in our findings, does not eliminate accumulations prior to 1913, and we see no reason why it should. No authority is cited, nor found by us, so requiring. We consider pre-1913 earnings as covered by the stipulated figures as of the beginning of 1942, i.e., $4,776.89. We hold that the petitioner's equity invested capital is not to be computed upon the basis of property values above the $15,000 original stock subscriptions.
The petitioner urges deduction of amounts paid for club dues for its officers belonging to Kiwanis, Rotary, and Fort Worth Clubs. Showing of business gotten was made only as to Kiwanis Club. The dues which were disallowed in the deficiency notice were for ‘club dues‘ in an aggregate amount. No proof was made of the amount of dues paid to any particular club. No proof was made that the clubs were joined for business reasons, or that they were primarily used for that purpose, or, except as already stated, resulted in any particular business. Though deduction of dues has been allowed under some circumstances, Johnson v. United States, 43 Fed.Supp. 377; reversed without mention of the point, 135 Fed.(2d) 125 (wherein ‘purely‘ business purpose and obtaining of particular business was shown), on the record before us we think the denial of deduction must be sustained for indefiniteness of proof.
There remains for consideration the question of whether the petitioner is liable for a penalty for failure to file timely excess profits tax return for 1942. Section 291(a) of the Internal Revenue Code
controls. It is not denied that the return was not filed within the statutory time, but petitioner's contention is that the matter was left to its auditor, and that there was not neglect and that it acted in good faith, with reasonable cause, the net income shown on the income tax return for the year 1942 being less than $5,000. No advice of counsel is shown. The auditor may have merely forgotten to file the return. Obviously, the showing made is insufficient to show reasonable cause. Mere leaving the matter to the auditor proves nothing in the way of reasonable cause. In the cases cited by the petitioner, there was finding of reasonable cause; but in P. Dougherty Co., 5 T.C.791, we had before us, in effect, the contention here raised, that is, that the petitioner did not believe it had any excess profits net income. Here, though the petitioner does not refer to section 729(b)(2) of the Internal Revenue Code, which, in the form applicable to 1942, provided that no return be filed if excess profits net income is not greater than $5,000, we presume, from the reference to income less than $5,000, that the intention is to rely thereon. It was relied on the Dougherty case, but, citing certain cases to the effect that mistaken belief that no return was required does not demonstrate reasonable cause for failure to file return, we held the penalty properly applied. That case, with those cited therein, requires the same holding here, and we find no error in the addition of the penalty.
SEC. 291. FAILURE TO FILE RETURN.(a) In case of any failure to make and file return required by this chapter, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the tax: 5 per centum if the failure is for not more than thirty days with an additional 5 per centum for each additional thirty days or fraction thereof during which such failure continues, not exceeding 25 per centum in the aggregate. * * *
Decision will be entered under Rule 50.