Opinion
Docket No. 24134.
1951-07-27
AJAX ENGINEERING CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Frank W. Harris, Jr., C.P.A., for the petitioner. Kalman A. Goldring, Esq., for the respondent.
TAXABLE YEAR— BEGINNING OF.— During a period prior to actual incorporation of petitioner certain business was transacted in the name of an existing corporation and petitioner's incorporators did not deal as agents for or transact business in the name and on behalf of the proposed corporation. Held, that petitioner's first taxable year began on the date of its incorporation. Frank W. Harris, Jr., C.P.A., for the petitioner. Kalman A. Goldring, Esq., for the respondent.
Respondent determined a deficiency in the excess profits tax of petitioner of $37,701.17 for the taxable year February 7, 1942, to June 30, 1942. Petitioner asks for a redetermination, contending that its taxable year began July 1, 1941, and ended June 30, 1942.
FINDINGS OF FACT.
Petitioner, hereinafter sometimes called Engineering, is a corporation existing under the laws of New Jersey with an office at Philadelphia, Pennsylvania. Its income and excess profits tax returns were filed with the collector for the first district of Pennsylvania. The excess profits tax return purported to cover the period from July 1, 1941, to June 30, 1942.
Engineering was incorporated in New Jersey on February 7, 1942.
The events leading up to its incorporation were as follows: On or about June 1, 1941, Dr. G. H. Clamer and Manuel Tama discussed the formation of a corporation to manufacture electric induction furnaces for melting aluminum. In 1941 and 1942 Clamer owned or controlled a majority of capital stock of Ajax Metal Company and was president and a director of that company. Tama was an outstanding engineer and inventor specializing in electric induction furnaces for melting aluminum.
It was agreed that if sufficient business could be obtained, particularly an order from Amtorg Trading Corporation, a new corporation would be formed in which Tama would have a stock interest and a share of profits. A majority of stock in the new corporation was to be subscribed to by Ajax Melting Company. That company was also to assist the incorporators by advancing funds and permitting the incorporators to make contracts to purchase goods in its name where necessary. These financial arrangements were similar to those previously employed by Ajax Metal Company and the operating heads of its other subsidiary companies.
The first meeting of the proposed incorporators was held July 3, 1941. In addition to Clamer and Tama, E. A. Ginkinger, treasurer of Ajax Metal Company and two of its subsidiary companies, also was present. The prospects of securing business were discussed and plans for soliciting business were made. Tama was employed as manager at a salary of $5,000 per annum, beginning July 1, 1941, and subject to ratification by the corporation when organized.
In June or July 1941 an office for carrying on the new business was opened in Trenton, New Jersey, and the necessary engineering and drafting services for designing the furnaces were arranged for. Special attention was paid to the expected Amtorg order and designs and specifications were prepared under Tama's direction.
Another meeting of the proposed incorporators was held on September 17, 1941. Ginkinger and Tama reported on the progress of negotiations with Amtorg Trading Corporation and stated that a tentative order for 30 furnaces at a price of $625,000 had been received.
The incorporators were unwilling to accept such a large order, especially under conditions then existing with Russia, unless payment could be secured by an irrevocable letter of credit. Amtorg insisted, however, that if a letter of credit was to be issued they wanted some assurance as to the financial responsibility of the people back of the transaction. The order was then placed in the name of Ajax Metal Company and a formal confirmation was received by that company on October 18, 1941.
Ajax Metal Company itself did not make electric furnaces, but several of its subsidiaries did. The contract was turned over to Tama and he was told to proceed on behalf of the new venture.
A further meeting of the proposed incorporators was held November 17, 1941. Counsel was present. The corporation laws of the various states were considered. The execution of a lease for a property in New Jersey was discussed as was the purchase of a plant in New Jersey.
Also, in November orders were placed by Ajax Metal Company with Industrial Engineering Works and Westinghouse Electric International Company for the manufacture of various castings and other materials needed for the furnaces. These orders were placed in the name of Ajax Metal Company pursuant to the original understanding among the proposed incorporators that that company would furnish whatever funds were necessary to get the new venture under way.
The materials so ordered were received by Engineering in 1942 and used in the manufacture of the furnaces sold to Amtorg Trading Corporation. After the initial advance Engineering paid the balance due on these materials in 1942.
On December 1, 1941, a plant was leased in Trenton, New Jersey. It does not appear in whose name the lease was taken, but Engineering paid the rent.
On December 10, 1941, the proposed incorporators held a further meeting and instructed counsel to proceed with the organization of a corporation in New Jersey to be called Ajax Engineering Corporation. Ginkinger was instructed to open a bank account as soon as the funds in payment of the stock to be issued were received.
On December 11, 1941, Ginkinger advised the Office of Production Management, Division of Contract Distribution, that it had been decided to form the Ajax Engineering Corporation, and inquired whether a new preference rating certificate in the name of the Ajax Engineering Corporation would be necessary, or whether it would be satisfactory to them if the Ajax Engineering Corporation used the old priority certificate. Ginkinger also advised the Office of Production Management that he was acting as treasurer of the new corporation, which would manufacture the furnaces ordered by the Amtorg Trading Corporation.
Under date of December 12, 1941, Ginkinger, as treasurer of the Ajax Engineering Corporation, received a letter from the Division of Contract Distribution of the Office of Production Management advising him that the Preference Rating Certificate previously issued to the Ajax Metal Company could continue to be used by the Ajax Engineering Corporation ‘even though the contract has been assigned to your newly formed subsidiary.‘
The Office of Production Management stated that ‘this Amtorg order is highly important and it is desirable to make the utmost efforts to see that delivery is made at the earliest practicable date,‘ and advised Ginkinger that the fact that the work would be done by the Ajax Engineering Corporation would not affect the priority rating or the obtaining of necessary materials. They further stated that rather than complicate the situation by issuing a new certificate in the name of the Ajax Engineering Corporation their office felt that the best results could be accomplished by continuing the use of the certificate already issued.
On December 31, 1941, Ajax Metal Company billed Engineering for the total amount advanced to the incorporators for salaries, travel expenses, etc., in the amount of $17,753.62.
On January 27, 1942, Ajax Metal Company paid Engineering $9,000 on its subscription to Engineering stock and a bank account was opened for Engineering in which the $9,000 was deposited the same day.
The State of New Jersey issued a charter to Engineering on January 19, 1942, but this was surrendered because it was incorrect in not naming Clamer, Tama, and Ginkinger as incorporators, and a new charter was issued on February 7, 1942.
The first meeting of the directors of Engineering was held on February 16, 1942. Retroactive compensation was approved for Clamer, Ginkinger, and Tama, and all agreements, contracts, and other acts entered into and undertaken on behalf of Engineering were ratified and confirmed.
Engineering completed the Amtorg contract during 1942 and the sum of $477,750 billed prior to June 30, 1942, was reported as income on the income and excess profits tax returns for the fiscal year July 1, 1941, to June 30, 1942, filed by Engineering.
All preliminary designing and engineering expenses incurred in connection with the sale of the furnaces to Amtorg and other expenses and costs were likewise treated as expenses for the fiscal year July 1, 1941, to June 30, 1942, whether incurred in the year 1941 or in 1942 prior to June 30, 1942.
The Commissioner determined a deficiency of $37,701.17 in petitioner's excess profits tax. In the statement accompanying the notice of deficiency it was stated:
Your contention that your taxable year began July 1, 1941, and ended June 30, 1942, is denied. It is held that, in applying the provisions of Section 711(a)(3) of the Internal Revenue Code, the period beginning February 7, 1942, and ending June 30, 1942, constituted your taxable year. In this connection, there is no merit to your position that the Commissioner's allowance of the item of $17,753.62 representing payment by your subsequent to being incorporated on February 7, 1942, to Ajax Metal Company and Ajax Electrothermic Corporation for expenditures incurred prior thereto by said companies with respect to a contract assumed by your upon incorporation, is inconsistent with his determination that your taxable year began February 7, 1942, and ended June 30, 1942. This is for the reason that the allowance of said item is predicated on the ground that it was a part of your cost in acquiring said contract.
OPINION.
TIETJENS, Judge:
The parties agree that the only question here is when petitioner's first taxable year began. If it began in 1941, as contended by petitioner, the Revenue Act of 1941 would apply to the determination of petitioner's excess profits tax; if in 1942, as argued by respondent, the higher rates of the Revenue Act of 1942 would be brought into play.
Respondent's position is that petitioner had no existence either in fact or in law until its charter was granted on February 7, 1942, and that its taxable year began on that date. On the other hand, petitioner points out that it actually established its business in 1941 when it was agreed to incorporate the enterprise if an order could be obtained from Amtorg Trading Corporation, followed by the hiring of Tama as manager, the renting of an office, the employing of draftsmen and other employees, the securing of the Amtorg order, designing the furnaces, and renting a factory, thereby accomplishing a substantial portion of the work which eventually produced the income on which petitioner is to be taxed. Accordingly, petitioner contends that the year 1941 is the important one tax-wise.
We agree with respondent. The petitioner came into legal existence when its certificate of incorporation was filed on February 7, 1942, Eveready Loan Co., 2 T.C. 1035, and while the events set forth above took place, we do not think it is established that they were done by or on behalf of the petitioner. In their dealings among themselves the prospective incorporators had in mind that petitioner would some day be organized and become an entity in fact and law. When they dealt with others, however, we cannot find on this record that they ever dealt as agents for a proposed corporation. The all important Amtorg order was not taken in the name of the incorporators or of petitioner. As a matter of fact, neither the name of petitioner nor the state of its incorporation was decided upon until sometime in December 1941. The orders for important materials with which to complete the furnaces were placed with the suppliers in the name of Ajax Metal Company and not on behalf of the proposed incorporators or petitioner. The reasons for this may have been clear to Ajax Metal Company and the other proposed incorporators, but we cannot find that any revelation was made to others or that persons other than those within the circle of proposed incorporators had any idea they were transacting business for the benefit or in the name of a corporation yet to be formed. The evidence points the other way. Outsiders were apparently unwilling to do business with the group until Ajax Metal Company was brought into the picture and contracted in its own name. During that part of 1941 when petitioner claims it was doing business it seems to us petitioner was hardly more than a gleam in the eyes of the proposed incorporators. We think this case distinguishable from Camp Wolters Land Co. v. Commissioner, 160 F.2d 84, relied on primarily by petitioner. There the court stated:
* * * the incorporators: (a) held themselves out as a corporation; (b) made deposits in the bank, acquired leases, wrote checks, bought land, executed leases, collected rent, borrowed money, accepted contributions— all in the name of the corporation.
No significant action here, unless it be the correspondence with the Office of Production Management inquiring in December 1941 whether a new preference rating certificate in the name of petitioner would be necessary or whether petitioner could use the old priority certificate standing in the name of Ajax Metal Company, was taken in the name of petitioner. Nor is there any controversy here over items of income or deductions, as in Camp Wolters Land Co. v. Commissioner, supra.
Respondent has allowed all claimed deductions.
We hold that respondent was correct in determining that petitioner's taxable year began on February 7, 1942, the date of its incorporation.
Decision will be entered for the respondent.