Opinion · United States Tax Court
GIANT AUTO PARTS, LTD. v. COMMR. OF INTERNAL REVENUE, 13 T.C. 307 (1949)
13 T.C. 307
- Type
- Opinion
- Court
- United States Tax Court
- Jurisdiction
- Federal
- Date
- 1949-09-15
- Topic
- general
GIANT AUTO PARTS, LTD. v. COMMR. OF INTERNAL REVENUE, 13 T.C. 307 (1949) GIANT AUTO PARTS, LTD., BY JACOB FROST, JULIUS FROST, MILTON FROST, IRVINFROST, SEYMORE FROST, AND MARIE FROST LEVIN, FORMERLY DOING BUSINESS ASGIANT AUTO PARTS, LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE,RESPONDENT. Docket No. 16290.United States Tax Court.
Citator
UpLaw has not yet analyzed GIANT AUTO PARTS, LTD. v. COMMR. OF INTERNAL REVENUE, 13 T.C. 307 (1949). The absence of a flag is not a finding that it is good law.
GIANT AUTO PARTS, LTD. v. COMMR. OF INTERNAL REVENUE,13 T.C. 307(1949)
GIANT AUTO PARTS, LTD., BY JACOB FROST, JULIUS FROST, MILTON FROST, IRVIN
FROST, SEYMORE FROST, AND MARIE FROST LEVIN, FORMERLY DOING BUSINESS AS
GIANT AUTO PARTS, LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT.
Docket No. 16290.
United States Tax Court.
Promulgated September 15, 1949.
Declared Excess profits Year Income tax value excess tax profits tax
1942 ............. $1,658.64 $2,650.51 $9,824.05 1943 ............. $1,767.61 1,907.36 5,062.73 1944 ............. 2,863.31 1,614.72 ----------- ----------- ---------- Total ........ 6,289.56 6,172.59 14,886.78
The sole issue herein is whether Giant Auto Parts, Ltd., during the years 1942, 1943, and 1944 was an association taxable as a corporation within the meaning of section 3797 (a) (3) of the Internal Revenue Code.
1942 ............. $1,658.64 $2,650.51 $9,824.05 1943 ............. $1,767.61 1,907.36 5,062.73 1944 ............. 2,863.31 1,614.72 ----------- ----------- ---------- Total ........ 6,289.56 6,172.59 14,886.78
FINDINGS OF FACT.
Giant Auto Parts, Ltd., hereinafter sometimes referred to as petitioner, during the years 1942, 1943, and 1944 was engaged in the business of auto wrecking and the selling of auto parts, auto supplies, and scrap iron, with its principal place of business at 76 North Main Street, Akron, Ohio. Petitioner filed partnership returns of income for each of the years 1942, 1943, and 1944 with the collector of internal revenue for the eighteenth district of Ohio at Cleveland, Ohio.
In 1930 Jacob Frost and two associates entered into the auto-wrecking business. Jacob had at that time five children, namely, Julius, Seymore, Irvin, Milton, and Marie. Within two or three months after the formation of the business, Jacob bought out his associates and thereafter, with the help of his children, operated the business as a sole proprietorship.
In 1934 the business was organized as an Ohio corporation under the name of the Giant Auto Wrecking Co., all of the outstanding stock of which was held by Jacob and his children. The corporate officers as of June 30, 1938, its date of dissolution, were Jacob Frost, president; Seymore Frost, vice president; and Marie Frost Levin, secretary-treasurer. As almost all of the corporation's salary expense represented the salaries of Jacob and his children, it was decided to dissolve the corporation in order to avoid payments of social security, workmen's compensation, and unemployment insurance in respect to such salaries.Page 309
On July 1, 1938, Jacob and three of his sons, Julius, Seymore, and Irvin, filed with the Recorder of Summit County, Ohio, an agreement purporting to organize Giant Auto Parts, Ltd., the petitioner herein, as a limited partnership association under sections 8059-8078 (inclusive) of the Ohio General Code. The partnership agreement reads in part as follows:
The undersigned, all residing in the County of Summit, Ohio, and desiring to form a Limited Partnership Association as authorized by and provided for by Sections 8059-8079 (inclusive) [sic] of the Ohio General Laws, do hereby certify.
1) That the undersigned have organized a Limited Partnership Association which shall be conducted under the name and style of "Giant Auto Parts, Limited".
2) The principal place of business of the said Limited Partnership Association shall be located at 690 E. Tallmadge Ave., Akron, Summit County, Ohio.
3) This association is created for a period of twenty (20) years duration.
4) The purpose of this Limited Partnership Association shall be the buying, selling, exchanging and dismantling of motor vehicles, and the buying and selling of new and used automobile parts and accessories, and the doing of all things necessary and incidental thereto.
5) The names of the partners, and the amount of their contributions to this association are as follows:
Jacob Frost ........................... $5,000.00 Julius Frost .......................... 100.00 Seymore Frost ......................... 100.00 Irving Frost .......................... 100.00
6) The following persons, to wit, Jacob Frost, Julius Frost, Seymore Frost and Irving Frost have been elected as managers of this association and Julius Frost has been elected chairman, and Jacob Frost has been elected treasurer and Seymore Frost has been elected secretary.
7) The interest of any partner in this association, in event any partner desires to dispose of his interest, shall be first offered for purchase by this association. The price shall be determined between the parties, and if that can not be determined by them, then such price shall be arrived at by a Board of Arbitration to consist of three persons, one selected by the selling partner, one selected by the association and the two so selected to select a third person. In event the association refuses to purchase the interest of a partner desiring to sell, then such partner may sell and dispose of his interest to any other person.
In July 1938 the ages of Jacob's children were Marie, 26; Seymore, 24; Milton, 22; Irvin, 20; and Julius, 19.
As of July 1, 1938, capital accounts were opened on the petitioner's books in the following names and amounts:
Jacob Frost ........................... $5,439.45 Irvin Frost ........................... 108.78 Julius Frost .......................... 108.78 Seymore Frost ......................... 108.78
Julius began working in the business on a part time basis in 1930. His activities with the petitioner included the buying and dismantlingPage 310of wrecked or used cars, selling of parts, the purchase of shop equipment, and the hiring and firing of employees. Julius has been with the petitioner continuously since 1938, except for the time spent by him in the armed forces during 1943, 1944, and 1945.
Marie Frost Levin, the eldest of Jacob's children, was active in the business while it was operated as a corporation, keeping its books, buying and selling merchandise, and hiring and firing its employees. Marie was not a member of the partnership formed on July 1, 1938, and was not active in the business at that time. In 1941 Marie was credited with a capital investment of $762.40 and given a 5 per cent interest in the partnership.
Milton worked in the business from 1934 to 1937, except for a four-month period during 1935. He was not a member of the petitioner when it was organized in 1938.
In 1939 a capital account was opened in the name of Milton, crediting him with an investment of $204.40. Milton, who actually paid in no cash, withdrew from the partnership after two or three months and did not return until some time in 1941, when he was credited with a capital investment of $762.40 and was given a 5 per cent interest in the business. He served in the armed forces from August 1942 until some time in 1945. While engaged in the business of the petitioner, Milton made purchases and sales of cars and parts, and hired and fired employees. He established and took charge of the auto glass department, but performed services in all departments of the petitioner's business.
Seymore has been active in the business since 1930, except for a period from 1934 to 1937. In the petitioner's business he bought cars, sold parts, and hired and fired employees. Seymore has been active in the partnership business since it's origin in 1938, and he did not serve in the armed forces during World War II.
Irvin commenced working in the business in 1930. His activities included yard work and the dismantling of cars, buying and selling for the petitioner, and the hiring and firing of employees. When the petitioner opened a store on Kenmore Boulevard in Akron, Irvin was placed in charge. Irvin served in the armed forces from February 12, 1941, until August 8, 1945.
Jacob and his children, in performing their various duties and in purchasing and selling merchandise and hiring and firing employees, acted without supervision and used their own judgment.
In 1944 signature cards were filed authorizing Jacob and Seymore to sign and Bernard Folb, office manager and bookkeeper, to countersign, checks drawn on an employees defense bond account, a pay roll account, and a commercial account, held in the name of Giant Auto Parts, Ltd., at the First-Central Trust Co. of Akron. In 1942 a signature card had been filed authorizing Jacob and Julius to signPage 311checks on the employees defense bond account. In signing checks on these various accounts, the parties never affixed any title such as manager, chairman, treasurer, or secretary to their signatures.
The Akron, Ohio, city directory for the year 1943 listed the petitioner under the name of "Giant Auto Parts, Ltd.," with capital of $5,765.79, and named Julius as chairman, Jacob as treasurer, and Seymore as secretary. A letter dated January 15, 1943, sent by the petitioner to its customers, informing them of Julius' entry into the service, was signed "Julius D. Frost, Chairman, Giant Auto Parts, Ltd."
Insurance policies covering the real and personal property of the petitioner were carried in the name of "Julius Frost, Seymore Frost, Jacob Frost, Milton Frost, Irvin Frost, and Marie Frost Levin, doing business as Giant Auto Parts, Ltd.," and described the business as a "partnership."
Invoices of creditors were issued in the names of "Auto Parts," "Giant Auto Supply," "Giant Auto Company," and "Giant Auto Parts, Ltd." From one-half to two-thirds of such invoices were made out in the name of "Giant Auto Parts, Ltd."
Sales tax receipts from the State of Ohio were made out in the name of "Jacob, Julius, Seymore Irvin Frost." Petitioner's reports to the Bureau of Unemployment Compensation for the State of Ohio and its Federal excise tax returns for 1942, 1943, and 1944 were executed in the name of "Jacob, Julius Frost et al., d. b. a. Giant Auto Parts, Ltd."
The petitioner maintained at its North Main Street establishment a Neon sign which read "Giant Auto Parts" and various other painted signs reading "Giant Auto Parts, Ltd." A painted sign at the Tallmadge Avenue yard read "Giant Auto Parts, Ltd." Petitioner's advertising was conducted under various names, including "Giant Auto Parts," "Giant Auto Parts, Ltd.," and "Giant Auto Parts, Limited."
Petitioner filed suits as plaintiff in the City Court of Akron in the name of "Giant Auto Parts, Limited," on March 17, 1939, December 10, 1941, and February 25, 1942. An answer to a suit brought by the city of Akron against the petitioner was filed on November 29, 1945, in the name of "Giant Auto Parts, Ltd." and signed by Seymore Frost. In January 1947 a suit was brought against the petitioner in the name of "Seymore G. Frost, Jacob Frost, Julius Frost, and Bernard Folb d. b. a. Giant Auto Parts, Limited."
During the years 1942, 1943, and 1944 title to the real properties located at 76-78 North Main Street and at 690-710 Tallmadge Avenue was held in the name of "Giant Auto Parts, Limited." A number of United States bonds were also purchased with the funds of the petitioner in the name of "Giant Auto Parts, Ltd., and Unincorporated Association."Page 312
The members of the petitioner's organization held no regular or formal meetings and kept no minutes, nor were annual elections held for the selection of managers or officers.
Since its organization petitioner has employed an accountant to keep its books and records. Petitioner maintained a set of books disclosing its daily transactions of business and in each year set up a general ledger which was used as a summary. A subsidiary ledger of accounts payable disclosing the petitioner's liabilities was kept in which entries were made once a month. Petitioner maintained in its books accounts disclosing the capital subscription of each of its members.
The petitioner has never paid salaries to Jacob or any of the children, but the partners from time to time drew such sums as were needed for living expenses, and the amount of each withdrawal was charged against the particular partner's share of the profits.
The undrawn share of the profits was credited to the investment account of each member according to his percentage of interest in the business. From and after the year 1943 the business profits were credited to an account entitled "Accounts Payable — Partners" and the drawings of the members were thereafter charged against this account.
For the years 1942, 1943, and 1944, petitioner filed partnership information returns, disclosing its annual profits, and the distributable shares of the members were reported in their individual income tax returns for each year.
Following the organization of the petitioner, five documents purporting to alter or transfer interests held by the various members in the business were executed and recorded in compliance with the Ohio Statutes, sections 8066 to 8078, inclusive, dealing with limited partnership associations.
On April 12, 1939, an amendment to articles was executed which read in part as follows:
* * * the members of this association did meet at a duly called and authorized meeting on April 12, 1939. Upon motion duly made and seconded, and unanimously approved by all of the members, Article 5 of the original statement of Giant Auto Parts, Limited, was and is amended to read as follows:
5) The names of the partners, and the amount of their contributions to this association are as follows:
Jacob Frost ........................... $5,000.00 Julius Frost .......................... 100.00 Seymore Frost ......................... 100.00 Irving Frost .......................... 100.00 Milton Frost .......................... 100.00
On January 6, 1941, a document was executed which was entitled "Transfer of Shares and Interests in Giant Auto Parts Limited"Page 313and bore the signatures of Seymore, Jacob, Julius, Irvin, and Milton Frost. It read as follows:
Each of the partners of Giant Auto Parts, Limited, relinquish and assign to the GIANT AUTO PARTS, LIMITED, his share and interest in the Giant Auto Parts, Limited, for the purpose of redistribution. All of said shares and interests being fully paid.
In accordance with the rules and regulations of the Giant Auto Parts, Limited, and with the written consent of all of the share and interest holders of the partners, the shares and interests of the partners, shall be and are redistributed and transferred as follows:
To Jacob Frost a Thirty-five (35%) per cent interest To Julius Frost a Twenty-five (25%) per cent interest To Seymore Frost a Fifteen (15%) per cent interest To Irvin Frost a Fifteen (15%) per cent interest To Milton Frost a Five (5%) per cent interest To Marie Frost Levin a Five (5%) per cent interest
On January 7, 1943, Jacob Frost executed an instrument entitled "Transfer of interest in limited partnership," purporting to convey his 35 per cent interest in the business to Julius. This transfer was made to protect the interest of Jacob, who was at that time experiencing marital difficulties. After the transfer, Jacob continued to be active in the business, shared in its profits in proportion to his interest, and his distributable shares thereof were reported in the partnership information returns and in his income tax returns for 1943 and 1944. On July 2, 1943, Milton Frost also transferred his 5 per cent interest in the petitioner to Julius. At the time of this transfer, Milton was in the Army and feared that his former wife and his child would be able to assert an interest in the business in the event of his death. After the transfer, Milton continued to draw funds from the business and his distributable shares of its profits were reported in the partnership returns and in his individual income tax returns for 1943 and 1944.
Julius Frost held title to the interests of Jacob and Milton as trustee for the transferors and acquired no additional interest in the petitioner by virtue of the transfers.
On December 20, 1943, an instrument was executed by Julius D. Frost, Irvin Frost, Seymore G. Frost, and Marie F. Levin, entitled "Amendment to Articles of Giant Auto Parts, Limited," which read as follows:
Pursuant to various transfers of interest in this partnership heretofore made by the partners of this association, which transfers of interest were made under the rules and regulations prescribed by the association and delivered for record in accordance with law, and, in further pursuance of the laws governing this association, the names of the present partners of this association and the amounts which they have contributed to the capital of this association are as follows:Page 314
Julius Frost ........................... $24,054.20 Seymore Frost .......................... 5,550.97 Irwin Frost ............................ 5,550.97 Marie F. Levin ......................... 1,850.32
Petitioner's books reflected all of the aforementioned transfers and amendments.
In its partnership returns of income for 1942, 1943, and 1944, petitioner reported the following amounts of net income:
1942 ................................... $35,219.23 1943 ................................... 34,172.20 1944 ................................... 34,098.79
In January 1948 the petitioner was dissolved and was succeeded by a corporation known as "Giant Automotive Products, Incorporated."
The respondent in the notice of deficiency explained his determination as follows:
The alleged partnership agreement effectively prevents interruption of your business organization by withdrawal or death of any member; permits transferable interests; and provides for centralized management. It is, therefore, held that your organization is an association taxable as a corporation within the purview of section 3797 (a) (3) of the Internal Revenue Code.
OPINION.
Where, as here, the business entity resembles a corporation in some respects and a partnership in others, the real test is whether it more nearly resembles a corporation than a partnership in its general form and manner of operation.Bertv.Helvering,92 F.2d 491. In determining this question in the past the courts have consistentlyPage 315looked to the standards established by the Supreme Court inMorrisseyv.Commissioner,296 U.S. 344. There the Court, holding that the Commissioner had properly taxed an express trust as an "association," based its conclusion principally upon certain corporate characteristics which it found to be present in that case, namely, centralized control and management, limited liability, transferability of interests, title to property held in the name of the business entity, continuity of enterprise, and sustained operation of the business for profit. Cf.Bloomfield Ranchv.Commissioner,167 F.2d 586;Commissionerv.Fortney Oil Co.,125 F.2d 995.
The petitioner was organized in 1938 as a limited partnership association under sections 8059 to 8078, inclusive, of the Ohio General Code, which authorize and prescribe the procedure for the formation and operation of such a partnership association, and provide for the election of managers and officers, the limited liability of partners, the transferability of interests, the manner in which it may hold title to property and bring suits, and the means by which it shall keep the public and its creditors informed of its current liabilities and the capital subscription of each member. The original partnership agreement was executed in strict conformance with the aforementioned provisions of the Ohio General Code, and the evidence demonstrates that in conducting the business in subsequent years the partnership substantially adhered to the statutory requirements.
Under the partnership agreement, the petitioner's members enjoyed the privilege of transferability of interests, subject only to the obligation that a member desiring to sell must initially offer his interest to the association at a price fixed by a board of arbitration. Should the association refuse to purchase an interest once it was offered, the holder was thereafter free to sell to whomever he chose.
The transferability feature of the partnership agreement and the provisions of Ohio law under which the petitioner was organized insured continuity of the enterprise, uninterrupted by any transfer of a member's interest, whether by sale, death, or bankruptcy. Secs. 8066 and 8067, Ohio General Code. Moreover, the petitioner's members exercised this right on at least three occasions, executing and recording transfers of interests in accordance with the pertinent statutory provisions. Sec. 8066, Ohio General Code. On January 6, 1941, an agreement was executed reflecting the assignment of the interest of each member to the association and a redistribution of interests among the members, including Milton and Marie, who each received for the first time a 5 per cent interest in the business. In 1943 Milton and Jacob transferred their interests to Julius when it was feared that the interest of each might fall into the hands of an outsider.Page 316
During the taxable years in question title to the real properties used in the petitioner's business was held in the name of "Giant Auto Parts, Limited." United States bonds were also purchased in the name of the petitioner. The petitioner brought and defended suits in its own name. See sec. 8077, Ohio General Code.
The Ohio statute under which the petitioner was organized provided that the personal liability of the petitioner's members was limited to the amount of their respective subscriptions of capital. Sec. 8063, Ohio General Code. It is true that in certain circumstances the failure to comply with the requirements of Ohio law in respect to the keeping of a register of debts and liabilities and subscription list book and the use of the word "limited" in the partnership name could have subjected the members to liability beyond that set forth in the statute. Secs. 8060, 8063, and 8064, Ohio General Code. The mere possibility that such a contention might have been raised at some time by a creditor does not justify the conclusion that petitioner's members did not in fact enjoy limited liability in respect to partnership debts. It appears that the petitioner maintained on its regular books an accurate and complete account of all its debts and liabilities, and a separate capital account in the name of each member. We have found no support for the petitioner's argument that these accounts were not in conformance with the requirements of sections 8060 and 8064,supra. Moreover, sections 8061 and 8064, which deal with the effect of a failure to maintain a register of debts and liabilities and the omission of the word "limited" from the partnership name, clearly suspend the immunity granted by section 8063 only where it can be shown by the creditor that the partnership's failure or neglect was responsible for his loss. In our opinion, the liability of petitioner's members for its debts and liabilities bore more of a resemblance to the liability of members of a corporate enterprise than that of ordinary partners. Cf.Helm SmithSyndicatev.Commissioner,136 F.2d 440.
Petitioner's principal argument is that its business was not conducted under a centralized control or management such as characterizes a corporate enterprise. Petitioner cites as evidence in support of its contention that it was a close family partnership and the fact that its members purchased used or wrecked automobiles, sold merchandise, and hired and fired employees without obtaining in each instance express consent or specific authority from a board of managers, directors, or officers. In our opinion, the record falls far short of establishing the petitioner's contention.
The original partnership agreement recites that petitioner's members in 1938 elected Jacob, Julius, Seymore, and Irvin as managers, and Julius as chairman, Jacob as treasurer, and Seymore as secretary.Page 317There is evidence that during the taxable years in question the petitioner, in its business correspondence and advertising, made similar representations of having partnership officers. Moreover, the activities petitioner has shown to have been regularly performed by its members appear to have been in the nature of routine duties which are commonly delegated by a business to responsible employees. On the other hand, the record does not disclose in whom the responsibility was vested for determining matters of over-all business policy, such as the expansion of the business to include the sale of new auto supplies or the establishment of branch outlets. There is no evidence that decisions of major importance in the business were made by the individual partners solely on their own initiative.
It is true that the ownership of the business was confined to a few members of an intimate family group, that no regular or formal meetings were held, that no minutes were kept, and that no election of officers was held after the original execution of the partnership agreement. The petitioner's failure to observe the formalities in respect to meetings and elections and the fact it was owned by a small number of persons have no bearing upon its classification as a corporation or partnership.Morrisseyv.Commissioner, supra; Helveringv.Combs,296 U.S. 365;Helveringv.Coleman-Gilbert Associates,296 U.S. 369. It is not uncommon to find corporations with a single stockholder or a small number of stockholders, all of whom are members of the same family. The fact that petitioner's members included no one outside of the Frost family may well account for the petitioner's failure in the present case to observe strictly the formalities of the statute under which it was organized.
We also think that it is significant that the business prior to 1938 and after 1948 was conducted as a corporation. The members state that the sole reason for the dissolution of the original corporation and the formation of the petitioner in 1938 as a partnership association was to avoid the payment of social security and other benefits in respect to their own salaries. They also emphasize that after the organization of the petitioner the business continued to be operated in the same manner as it had been under the prior corporation. These facts constitute further evidence that the parties in forming the petitioner did not intend to completely forego the advantages of doing business under a corporate form in favor of an ordinary partnership.
It is unnecessary in the instant case to decide whether all partnership associations created under sections 8059-8078, inclusive, of the Ohio General Code constitute associations taxable as corporations under section 3797 (a) (3). Cf. Regulations 111, sec. 29.3797-6; O. D. 444, C. B. June 1920, p. 11. "The parties are not at liberty to say thatPage 318their purpose was other or narrower than that which they formally set forth in the instrument under which their activities were conducted."Helveringv.Coleman-GilbertAssociates, supra. While it is not controlling for Federal tax purposes how such a partnership may be classified under state law (Burk-Waggoner Oil Assn. v.Hopkins,269 U.S. 110;Peltonv.Commissioner,82 F.2d 473), it is interesting to note that a partnership organized under the same section of the Ohio General Code has been held to have the attributes of a corporation rather than those of an ordinary partnership.R. F.Roof, Ltd. v.Sommers,75 Oh. App. 511;62 N.E.2d 647. It is our judgment, after careful consideration of all the evidence, that the petitioner's organization and manner of operation were more closely akin to that of a corporation than a partnership. The respondent correctly determined that petitioner constituted an association taxable as a corporation.Decision will be entered under Rule 50.
- SEC. 3797. DEFINITIONS.
(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof —
* * * * * * *
(3) CORPORATION. — The term "corporation" includes associations, joint-stock companies, and insurance companies. ↩ - SEC. 29.3797-2. ASSOCIATION. — The term "association" is not used in the Internal Revenue Code in any narrow or technical sense. It includes any organization, created for the transaction of designated affairs, or the attainment of some object which, like a corporation, continues notwithstanding that its members or participants change, and the affairs of which, like corporate affairs, are conducted by a single individual, a committee, a board, or some other group, acting in a representative capacity. It is immaterial whether such organization is created by an agreement, a declaration of trust, a statute, or otherwise. It includes a voluntary association, a joint-stock association or company, a "business" trust, a "Massachusetts" trust, a "common law" trust, an "investment" trust (whether of the fixed or the management type), an interinsurance exchange operating through an attorney in fact, a partnership association, and any other type of organization (by whatever name known) which is not, within the meaning of the Code, a trust or an estate, or a partnership. ↩