The opinion
HAMILTON WEB CO. (A NEW YORK CORPORATION), DISSOLVED, BY HAMILTON WEB CO. (A RHODE ISLAND CORPORATION), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Hamilton Web Co. v. Commissioner
Docket No. 15966.
United States Board of Tax Appeals
19 B.T.A. 199 ; 1930 BTA LEXIS 2452 ;
March 4, 1930 , Promulgated
*2452 JURISDICTION. - In 1926 respondent determined and asserted a deficiency against the Hamilton Web Co., a New York corporation, dissolved in 1924. The petitioner, a Rhode Island corporation not in existence during the tax years and against which no transferee proceedings have been brought, filed a petition for the redetermination of the deficiency asserted against the taxpayer. Held that the Board has no jurisdiction and that the proceeding will be dismissed.
William A. Needham, Esq., for the petitioner.
Arthur H. Fast, Esq., for the respondent.
TRUSSELL
*199 This proceeding is for a redetermination of deficiences in income and profits taxes in the amounts of $4,865.38 for 1917; $20,432.44 for 1918; and $2,848.37 for 1919, asserted by respondent against the Hamilton Web Co., a New York corporation.
The issues in this proceeding have been limited to the following:
1. Whether the proposed assessment is barred by the statute of limitations.
*200 2. Whether respondent erred in not allowing as deduction, $22,333 for 1917 and $31,602 for 1918 on account of discarded patterns, alleged to have become obsolete in those years.
*2453 3. Whether respondent erred in not including in invested capital for each of the years 1917, 1918, and 1919, the amount of $135,809.46 as a paid-in surplus.
4. Whether respondent erred in not computing the corporation's profits tax for 1917 under the provisions of section 210 of the Revenue Act of 1917, and its profits taxes for 1918 and 1919 under the provisions of sections 327 and 328 of the Revenue Act of 1918.
At the hearing respondent made a motion that the Board dismiss this proceeding for lack of jurisdiction if the waivers executed by petitioner are invalid.
FINDINGS OF FACT.
In 1885 the Hamilton Web Co. was incorporated under the laws of the State of New York, and its principal office and its mills were located at Hamilton, R. I. From that date until its dissolution in 1924 it was engaged in the production of narrow woven fabrics, varying in width from a quarter of an inch up to three inches.
The said New York corporation filed its income and profits-tax returns for 1917, 1918, and 1919 on April 1, 1918, April 26, 1919, and March 9, 1920, respectively. With respect to the years 1917 and 1918, the said taxpayer executed and filed the following waivers bearing *2454 the seal of the Hamilton Web Co. of New York:
JAN. 23, 1923.
INCOME AND PROFITS TAX WAIVER
In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, Hamilton Web Co. of Hamilton, R.I., and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said corporation for the year 1917 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States and for other purposes," approved August 5, 1909, irrespective of any period of limitations.
(Seal)
Hamilton
Web
Company
HAMILTON WEB CO., Taxpayer.
JOSEPH WARREN GREENE, Jr., Treasurer.
By
D. H. BLAIR, Commissioner.
JANUARY 17, 1924.
INCOME AND PROFITS TAX WAIVER
In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, Hamilton Web Company, of Hamilton, Rhode Island, and *201 the Commissioner of Internal Revenue, *2455 hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or warprofits taxes due under any return made by or on behalf of the said Company for the years 1917 and 1918 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation, or the statutory period of limitation as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned.
(Seal)
Hamilton
Web
Company
HAMILTON WEB C0.
JOSEPH WARREN GREENE, Jr.,
By
D. H. BLAIR, Commissioner
The company's property and business was in Rhode Island and for several reasons it was found to be more desirable to have a Rhode Island charter rather than a New York charter. Accordingly, on March 25, 1924, a Rhode Island *2456 corporation was organized by Jeseph Warren Greene, joseph Warren Greene, Jr., and Joseph G. Henshaw, under the name and style of "Hamilton Web Company," for the purpose of carrying on the same business.
At the last meeting of the stockholders of the New York corporation, held on April 10, 1924, the following resolution was passed:
RESOLVED: That this corporation sell and convey to the Hamilton Web Company, a corporation duly incorporated or to be incorporated under the laws of the state of Rhode Island, all its real estate, personal property and other assets of every kind, nature, and description, including its good will, in consideration of the said Hamilton Web Company, Rhode Island corporation assuming all the debts, obligations and liabilities of this corporation, and issuing to the present stockholders of record of this corporation shares of stock in said Rhode Island corporation of the par value of $100 each, equal in number to the number of shares which they now hold in this corporation, and that the President and Secretary and all other necessary and proper officers are hereby authorized and directed, in the name and in behalf of this corporation to make, execute and deliver *2457 to said Hamilton Web Company, Rhode Island Corporation, all written instruments requisite or necessary to make the aforesaid conveyance and transfer.
The New York corporation conveyed all of its assets to the Rhode Island corporation on April 16, 1924, for a consideration of $10 and other valuable consideration; the stockholders of the New York corporation surrendered their stock and received in lieu thereof capital stock of the Rhode Island corporation of exactly the same proportionate interest; the Rhode Island corporation continued the operation of the business without interruption, and it paid all of the then known liabilities of the New York corporation. The incorporators of the Rhode Island corporation became its officers and each held the *202 same office he had held in the New York corporation. No change was effected except the securing of a new charter.
The certificate of dissolution of the New York corporation was filed with the Secretary of State of the State of New York on June 30, 1924, and on the same day the said corporation was formally declared dissolved under the provisions of section 105 of the New York Stock Corporation Law.
While the tax liability *2458 of the Hamilton Web Co. of New York for the years 1917, 1918, and 1919 was under consideration by the respondent, the following waivers were executed by an officer of the Hamilton Web Co. of Rhode Island, and that corporation's seal was affixed to each:
DECEMBER 20, 1924.
INCOME AND PROFITS TAX WAIVER
In pursuance of the provisions of existing Internal Revenue Laws, Hamilton Web Company, a taxpayer, of Hamilton, Rhode Island, and the Commissioner of Internal Revenue, hereby consent to extend the period prescribed by law for a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the years 1917 and 1918 under the Revenue Act of 1924, or under prior income, excess-profits or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation within which *2459 assessments of taxes may be made for the year or years mentioned, or the statutory period of limitation as extended by Section 277(b) of the Revenue Act of 1924, or by any waivers already on file with the Bureau, or for one year from the date of signing this waiver.
(Seal)
Hamilton Web Company
Incorporated 1924
Rhode Island
HAMILTON WEB COMPANY, Taxpayer.
By JOSEPH WARREN GREENE, Jr.,
Vice-Presdt. & Treas.
D. H. BLAIR, Commissioner.
INCOME AND PROFITS TAX WAIVER
FOR TAXABLE YEARS ENDED PRIOR TO JANUARY 1, 1922
AUGUST 24, 1925.
In pursuance of the provisions of existing Internal Revenue Laws Hamilton Web Company, a taxpayer, of Hamilton, Rhode Island, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits taxes due under any return made by or on behalf of said taxpayer for the year 1917 under existing revenue acts or under prior revenue acts.
*203 This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer *2460 by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
(Seal)
Hamilton Web Company
Incorporated 1924.
Rhode Inland
HAMILTON WEB COMPANY, Taxpayer.
By JOSEPH WARREN GREENE, Jr., Treas.
D. H. BLAIR, Commissioner.
INCOME AND PROFITS TAX WAIVER
FOR TAXABLE YEARS ENDED PRIOR TO JANUARY 1, 1922 AUGUST 24, 1925.
In pursuance of the provisions of existing Internal Revenue Laws Hamilton Web Company, a taxpayer of Hamilton, Rhode Island, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1918 under existing revenue acts, or under prior revenue acts.
This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall *2461 then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
(Seal)
Hamilton Web Company
Incorporated 1924
Rhode Island
HAMILTON WEB COMPANY, Taxpayer.
By JOSEPH WARREN GREENE, Jr., Treas.
D. H. BLAIR, Commissioner.
(WAIVER) Corporation
Hamilton Web Co., a corporation, organized under the laws of the State of New York in consideration of the assurance given it by officials of the Income Tax Unit of the Bureau of Internal Revenue that its liability for all Federal taxes imposed by the Act of Congress known as the Revenue Act of 1918 for the year ended December 31, 1919, on its net income received from all sources in said year, shall not be determined except after deliberate, intensive, and thorough consideration, hereby waives any and all statutory limitations as to *204 *2462 the time within which assessments based upon such liability may be entered. It is understood, however, that the above corporation does not, by the execution of this waiver, admit in advance the correctness of any assessment which may be made against if for said year by the officials of the Income Tax Unit. It is hereby understood that this waiver shall expire one year from the date of execution.
Executed this 22 day of October 1924.
(Seal)
Hamilton Web Company
Incorporated 1924
Rhode Island
(Signed) HAMILTON WEB CO., Corporation.
By JOSEPH WARREN GREENE, Presdt.
D. H. BLAIR, Commissioner.
INCOME AND PROFITS TAX WAIVER FOR TAXABLE YEARS ENDED PRIOR TO JANUARY 1, 1922
AUGUST 24, 1925.
In pursuance of the provisions of existing Internal Revenue Laws Hamilton Web Company, a taxpayer of Hamilton, Rhode Island, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1919 under existing revenue acts, or under prior revenue acts.
This waiver of the time for making any *2463 assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
(Seal)
Hamilton Web Company
Incorporated 1924
Rhode Island
HAMILTON WEB COMPANY, Taxpayer.
By JOSEPH WARREN GREENE, Jr., Treas.
D. H. BLAIR, Commissioner.
Subsequent to the dissolution of the New York corporation its board of directors, neither by resolution nor otherwise, expressly authorized the execution of the above-quoted waivers.
The respondent's 60-day deficiency notice dated March 18, 1926, was addressed to the Hamilton Web Co., Hamilton, R.I., and this proceeding was initiated on May 14, 1926, by the successor corporation.
The mills, now operated by the Hamilton Web Co. of Rhode Island, are located at Hamilton, R.I., *2464 and the same business has *205 been continuously operated at the same location by the Greene family since 1873. J. W. Greene, who died about 1888, was the original owner, and his son, James A. Greene, succeeded him. James A. Greene's son, Joseph W. Greene, Sr., became connected with the business in 1883, was president of the New York company, and is now president of the Rhode Island company. James W. Greene, Jr., went in the business in 1912, was treasurer of the New York company, and is now treasurer of the Rhode Island corporation.
The said business was commenced in 1866 by a partnership styled "Vaughn and Greene," and its books of accounts show the following items with respect to the book values of the partnership's fixed assets: Opening, 1866 Closing, 1873
Real estate $56,900.00 $80,935.59
Machinery 40,173.00 61,340.39
Fixtures 10,332.00 23,195.17
Total 107,405.00 165,471.15
In 1873 J. W. Greene took over the whole business including the said fixed assets, the water rights, etc., and the business was continued under the name of the Hamilton Web Co., an unincorporated company. J. W. Greene's son, James A. Greene, conducted the business *2465 as agent and a fixed rental was paid to J. W. Greene, for the use of the assets. The Hamilton Web Co. also paid a fixed rental for the use of the Anna Quatucket Mill, located upstream from the Hamilton Mill and owned by J. W. Greene. Inasmuch as the Hamilton Web Co. did not own the assets, no fixed asset accounts were set up on the books when it took over the business in 1873. As new machinery was installed, buildings erected or other improvements made, such items were entered on the books of the Hamilton Web Co., which show the following with respect to the book values of such fixed assets: Opening, 1873 Closing, 1885
Real estate $46,292.67
Machinery 27,364.99
Fixtures 27,743.67
Total 101,401.33
At various times during the period from 1873 to 1885 the fixed asset accounts were written down to allow for depreciation, but there was no fixed policy and the amounts charged off were more or less arbitrary.
*206 In 1885 J. W. Greene, who was then an old man, was advised to incorporate the business for the purpose of the distribution of his estate in the event of his death. He desired to leave the business to James A. Greene. The Hamilton *2466 Web Co. was incorporated in March, 1885, under the laws of New York, for a period of 50 years, with a capital stock of $150,000 par value. J. W. Greene, who owned all of the property and assets at the Hamilton Web Mill, paid them in to the corporation and received the total stock issue of 1,500 shares. The corporation commenced business on April 1, 1885, but the only item set up on its books was an inventory of raw materials, stock in process, finished goods, supplies, etc., totaling $30,337.
In October, 1888, an account set up on the corporation's books showed the following items as of April 1, 1885: Assets
Real estate $91,760
Machinery 42,053
Fixtures 15,850
Inventories 30,337
Total 180,000
Liabilities
Mortgage notes payable $30,000
Capital stock 150,000
Total 180,000
The elder J. W. Greene had no interest in a large capitalization and no account was taken of the actual value of the mill buildings, machinery, land, water rights, tenements, etc., paid in for stock. The so-called Anna Quatucket property was not paid in to the corporation, the Hamilton Web Co., but it continued to use and operate that mill. However, on December 1, 1896, the *2467 several heirs of J. W. Greene, deeded to the Hamilton Web Co. the Anna Quatucket property, including 50 acres of land, cotton factory and machinery, dye house, dwellings, etc., for a nominal consideration and the corporation assumed and later paid a mortgage thereon in the amount of $8,000.
During the period from 1885 to 1916, the corporation made large expenditures for buildings, machinery and other improvements which were charged off to expense. At various times entries were made in the books capitalizing a portion of the said items previously charged off. During the said period the fixed asset accounts were arbitrarily written down at various times for purposes of depreciation. In 1925 the Hamilton Web Co. of Rhode Island employed a certified public accountant who, with the help of Joseph Warren Greene, Sr., and J. W. Greene, Jr., made an examination of the books of the partnership, the unincorporated company, and the incorporated Hamilton Web Co. That examination of the books disclosed that from 1885 to 1916 there had been items of buildings, machinery, and fixtures amounting to $149,474.77 charged off to *207 expense which should have been capitalized. The books *2468 also showed that during that period items which had been charged off to expense and subsequently restored to capital amounted to $52,951.51, leaving a balance of $96,523.26 which it is claimed should now be restored to invested capital.
During the period from 1885 to 1916 the corporation maintained a shop in which it made repairs and also new parts for its various types of machinery and fixtures. The cost of the labor for such work was all charged off as an expense even though many of the items may have been properly capitalized.
The Anna Quatucket property has never been capitalized except to the extent of the $8,000 mortgage paid off, nor have the water rights been capitalized. At Anna Quatucket and the Hamilton Web Mills there is a sufficient head of water to run the machinery except in times of drought. The water is also used in dyeing and washing fabrics and for fire protection.
Prior to the World War the Hamilton Web Co. manufactured a great deal of narrow fabrics for pull-straps inserted in the backs of shoes. The pull-straps usually had the name of the shoe dealer woven into them or some particular design, and the Hamilton Web Co. employed the services of an expert *2469 designer to make the patterns. The patterns were used in making cards which were used on the looms so that the fabric was woven in the desired design. In 1917 about 971 patterns became useless and the cards were sold for junk but the patterns were filed away. In 1918 the demand for pullstraps practically disappeared and the cards for 1,370 designs were stored in the basement and the patterns filed away. Since 1918 not more than 40 patterns have been used in any one year. The original patterns last indefinitely and represent 75 per cent of the cost of the patterns and the sets of cards used on the looms. The cards are subject to wear, but have a life of several years. The patterns have been accumulated over a long period of years during which time the costs of both patterns and sets of cards have been charged off to expense.
OPINION.
TRUSSELL: Without deciding the issue relative to the validity of the waivers involved in this proceeding, we deem it proper to point out that if we were considering the merits of the case we would be constrained to hold, upon the facts of record and the authority of prior Board decisions, that the waivers executed by the Rhode Island corporation *2470 are invalid. Cf. ; ; ; ; .
*208 The case at bar is not a transferee proceeding and the record does not disclose that any attempt has been made by the respondent to assert the tax against the petitioner as a transferee of the Hamilton Web Co. of New York. The taxpayer against whom the respondent has determined and asserted the deficiencies in controversy for the years 1917, 1918, and 1919 is the Hamilton Web Co., a New York corporation which was dissolved in 1924. The petitioner, a Rhode Island corporation, did not come into being until 1924, subsequent to the tax years in question, and it is not the taxpayer against whom the deficiencies have been asserted. The Board has held that where a petition is filed by one other than the taxpayer, the Board is without jurisdiction to redetermine the deficiency asserted against the taxpayer. See *2471 ; ; ; ; ; ; .
Reviewed by the Board.
Order of dismissal will be entered accordingly.