Opinion
Docket Nos. 6713, 6714, 6720.
Promulgated March 31, 1947.
1. Petitioner H. D. Winship, in his individual capacity, on the facts, held, not entitled to a deduction for a net operating loss carryover in the year 1941.
2. Petitioner H. D. Winship, in his individual capacity, on the facts, held, taxable in 1941 on 100 per cent of dividends because the stock upon which the dividends were paid was his separate (not community) property.
3. Automotive Engineering Corporation, transferor, issued all its stock in 1931 in exchange for various patents. It was organized for the purposes, inter alia, of acquiring, using and disposing of patents, processes, and inventions, and to develop and grant licenses with respect to any patents. It entered into a licensing agreement in October 1941 which modified a previously existing licensing agreement. Held, that Automotive was doing business so as to be subject to the capital stock tax for the period ended June 30, 1942, and that it was therefore liable for the declared value excess profits tax for the calendar year 1942. Petitioners Winship and Hayes, transferees, are liable for the taxes due from Automotive Engineering Corporation.
Edgar T. Zook, Esq., and Robert M. Gane, C. P. A., for the petitioners.
Earl C. Crouter, Esq., for the respondent.
Respondent determined deficiencies in income and declared value excess profits taxes for the years and in the amounts as follows:
Declared Docket No. Year Income value excess No. tax profits tax Automotive Engineering {1941 Corporation ............ {1942 $221.26 Henry Dillon Winship, transferee ............. 6713 $11,925.35 Katherine Winship Hayes, transferee ............. 6720 Henry Dillon Winship ........ 6714 1941 18,351.50 Petitioners in Docket Nos. 6713 and 6720 admit transferee liability for any deficiency in tax of Automotive Engineering Corporation. The only question is whether the corporation was carrying on or doing business for any part of the year ended June 30, 1942, so as to be liable for declared value excess profits tax for the calendar year 1942.Two issues are involved in Docket No. 6714. The first question is whether dividends received by petitioner from Automotive Engineering Corporation in 1941 were taxable solely to petitioner as separate income, and not taxable one-half to petitioner and one-half to his wife, as community income. The second question is whether petitioner was entitled to a deduction for an alleged net operating loss for 1940 carried over to 1941.
The proceedings were consolidated.
All the returns were filed with the collector for the first district of California.
FINDINGS OF FACT.
Some of the facts have been stipulated by the parties. The stipulation of facts is incorporated herein by reference. For present purposes the facts may be set forth as follows:
Issue I. — Net Operating Loss Carry-over.
The petitioners, Katherine Winship Hayes and Henry Dillon Winship, are brother and sister. K. D. Winship, mother of petitioners, died on November 8, 1920. At the time of her death she owned as her separate property in California real estate which contained substantial deposits of chromite and manganese. By will she set up a testamentry trust out of the residue of her estate, consisting for the most part of her real estate holdings, for the benefit of the two petitioners and Emory Winship, her husband and father of petitioners. Emory Winship was given a life interest in one-third of the trust; at his death his interest passed to the petitioners. The trust was to terminate as to each petitioner when he or she reached the respective age of 30, at which time the corpus was to pass to them free and clear of the trust.
Emory Winship was designated trustee of the testamentary trust, and also executor under the will of his deceased wife. He was an engineer and had a thorough understanding of mechanics. Accordingly, while the estate was still in the process of administration he used funds of the estate in the development of various inventions relating to multiwheel vehicles. On August 10, 1922, he organized the Eight Wheel Motor Vehicle Co. for the purpose of acquiring, developing, and exploiting the multiwheel vehicles, patents, and inventions in which he was interested. He also caused to be organized, on March 10, 1921, the American Manganese Products Co., for the declared purpose of mining, marketing, and otherwise dealing in manganese and manganese ores. Emory Winship at no time owned any lands containing manganese ores otherwise than as executor, trustee, or life beneficiary of the estate of his wife.
During the existence of these corporations, Emory Winship advanced to the corporations funds from the estate of his wife and from the testamentary trust set up in accordance with her will. The testamentary trust was set up on October 31, 1923, the date of the final decree of distribution of the estate of the wife.
During probate of the wife's estate the funds of the estate could not properly be used, as Emory Winship used them, for the development of patents and inventions and for advances to the Eight Wheel Motor Vehicle and American Manganese Companies. All the funds which Emory Winship took from the estate for these purposes were charged against him personally on the books of the K. D. Winship estate. Throughout the period of the existence of the testamentary trust all moneys of the trust which Emory Winship used for these same purposes were also charged against him personally on the books of the trust. On June 6, 1929, petitioners and Emory Winship agreed to terminate the testamentary trust and to have an accounting and balance settled between the parties as to their respective obligations to one another on account of moneys expended for their respective accounts. By instrument dated December 18, 1930, the parties agreed that, after taking into account the value of Emory Winship's life interest in the testamentary trust, he was indebted to the trust on account of advances in the sum of $61,518.33 as of the close of business on August 31, 1929. On this same date petitioner Henry Dillon Winship was indebted to the trust in the sum of $131,296.90, and petitioner Katherine Winship Hayes was indebted in the sum of $58,057.51.
At the termination of the testamentary trust, petitioners set up an inter vivos trust for their benefit with the remaining assets of the testamentary trust. Emory Winship, J. W. Preston, Jr., and petitioner Henry Dillon Winship were trustees of the inter vivos trust. The trust was revocable by the petitioners and the trust was to continue in existence until July 1, 1939.
On February 12, 1931, Emory Winship organized the Automotive Engineering Corporation and transferred to it the various patents held by him and the Eight Wheel Motor Vehicle Co. relating to multiwheel vehicles, in exchange for all the authorized capital stock of Automotive, which consisted of 1,000 shares.
Emory Winship died on March 21, 1931, a legal resident of Georgia. Between the time of his death and the creation of the first inter vivos trust on August 1, 1929, net advances were made to Emory Winship by the inter vivos trust in the amount, including interest, of $51,423.86, or a total of $112,942.19, for which Emory Winship was indebted to the trust as of March 21, 1931.
Emory Winship had remarried. He died testate and his will provided that his second wife should receive $250 a month so long as she remained unmarried, and that, subject to such payments, his estate was to be divided equally among petitioners and a son of the second marriage. The will gave the executor the power to sell all of his property without order of court or previous notice.
The assets in Emory Winship's estate consisted of Georgia real estate, which was sold by a bank under a deed of trust in 1932, the 1,000 shares of stock of Automotive, a few dormant patents, and some small miscellaneous items. Petitioner Henry Dillon Winship was appointed executor of the estate.
The inter vivos trust did not file a claim against the estate of Emory Winship or otherwise attempt to collect the $105,774.19, plus interest, or a total of $112,942.19, which Emory Winship owed the trust at the date of his death. After the death of Emory Winship, the inter vivos trust made further advances to his estate, including small advances in 1933, 1934, and 1936. After 1936 the only asset in the estate was the Automotive stock.
On March 7, 1939, the inter vivos trust created in 1929 was terminated by petitioners and a new inter vivos trust was created by them on March 8, 1939. The corpus of the new trust consisted of the real and personal property and accounts receivable of the earlier trust. The new trust was also revocable by the consent of both beneficiaries.
On September 2, 1940, petitioner Henry Dillon Winship, as executor under the will of Emory Winship, transferred 50 shares of Automotive stock to an attorney in payment for legal services rendered to Emory Winship and the corporations which he controlled. On November 4, 1940, the probate court authorized petitioner Henry Dillon Winship, as executor, to sell the property of the estate of Emory Winship, including the stock of Automotive, in order to pay debts of the estate and the expenses of its administration. Petitioner Henry Dillon Winship, acting for himself and Katherine Winship Hayes, purchased the Automotive stock for a bid price of $1,000. After the stock of Automotive was sold the estate of Emory Winship retained no other assets of value.
In an amended fiduciary income tax return for the calendar year 1940 the second inter vivos trust claimed as a bad debt deduction $130,029.36 allegedly owed to it from the estate of Emory Winship and representing advances made to Emory Winship or his estate over a period of years.
The parties are agreed that the second inter vivos trust was revocable by petitioners as grantors, and that the income and deductions of the trust are includible and allowable in Winship's individual income tax returns.
Respondent determined that the debt owing by Emory Winship and his estate to the second inter vivos trust had become worthless prior to the year 1940, and that any loss sustained as a result of the bad debt was not attributable to the operation of any trade or business regularly carried on by petitioner Henry Dillon Winship, to give rise to a net operating loss deduction carry-over to the year 1941. The individual income tax liability of petitioner Katherine Winship Hayes for the taxable year 1941 is not in issue, and the question of the net operating loss deduction relates only to the income tax liability of petitioner Henry Dillon Winship.
Issue II. — Community Property.
Petitioner Henry Dillon Winship and his wife, Anne C. Winship, were married on January 9, 1926, and had been domiciled in California since 1932. Henry Dillon Winship will be referred to hereinafter as the petitioner under this issue.
Petitioner was executor of the estate of his father, Emory Winship, who died in 1931, domiciled in Georgia. The estate was still in the process of administration in 1940. The assets of the estate at that time consisted of 950 shares of Automotive Engineering Corporation stack, a small lot in Macon, Georgia, and a few dormant patents. On December 3, 1940, pursuant to the order of the court of ordinary, the 950 shares of stock of Automotive Engineering Corporation were offered for sale by the estate at public outcry. The stock was bought in at $1,000 on behalf of petitioner as agent for himself and his sister. On December 4, 1940, the 950 shares were transferred on the books of the Automotive Engineering Corporation to the name of "Henry Dillon Winship, Agent." On December 5, 1940, the certificate for the shares in the name of Henry Dillon Winship was surrendered and 475 shares of the stock were placed on the books of the company in the name of petitioner and the remaining 475 shares in the name of his sister.
Petitioner did not pay for the stock at the time it was purchased for him as agent.
In 1941 petitioner received as dividends on the Automotive Engineering Corporation stock held in his name the sum of $24,225. In his income tax return for 1941 petitioner reported the dividends as community income and included one-half thereof, or $12,112.50, in gross income.
An examination of petitioner's individual income tax return for 1941 was made prior to March 1943. On March 29, 1943, petitioner paid by personal checks to the attorneys who had furnished legal services to the estate of Emory Winship and to a firm which had set up and audited the books of the estate the respective sums of $1,056.21 and $403.70. The two checks were drawn on petitioner's personal checking account. At the time the checks were drawn there were deposited in the account undisclosed sums representing salaries paid to petitioner by the first and second inter vivos trusts, dividends received on the Automotive stock, and proceeds from the sale of the Automotive stock.
Respondent included in petitioner's gross income for 1941 the full amount of the dividends received on the Automotive Engineering Corporation stock.
Issue III. — Declared Value Excess Profits Tax Liability of Automotive Engineering Corporation, Transferor.
The Automotive Engineering Corporation, a Delaware corporation, was organized by Emory Winship on February 12, 1931. In exchange for all the capital stock of the corporation, consisting of 1,000 shares, Emory Winship transferred to the corporation the various patents held by him and the Eight Wheel Motor Vehicle Co. relating to the multiwheel vehicles. The certificate of incorporation recited that the objects, purposes, and business to be carried on by the corporation were, inter alia:
(1) To apply for and register patents; to purchase and otherwise acquire, and to hold, use, own, operate, sell, assign and otherwise dispose of, patents, inventions, improvements, processes, trademarks and trade names used in connection with or secured under letters patent of the United States [ sic] of America and any and all countries, and licenses, concessions and other agreements, and rights conferring exclusive, non-exclusive or limited rights to use any and all inventions, improvements and processes, the acquisition or use of which may be deemed advisable by the corporation, and, particularly, patents, inventions, improvements and processes used in connection with automobiles and the automotive industry; and to use, exercise, develop, grant and receive licenses with respect to, and otherwise to turn into account, any and all such patents, inventions, improvements and processes and trade-marks and trade names, and any and all secret or other information with regard thereto.
On November 1, 1932, the Automotive Engineering Corporation entered into a licensing agreement with the Timken Detroit Axle Co., whereby Timken acquired the exclusive right to use, manufacture, and sell multiwheel units or other equipment embodying the patents and inventions belonging to Automotive and the exclusive right to license to others the right to such use, manufacture, and sale, subject only to certain outstanding rights of other manufacturers and other licensing agreements granted by Automotive's predecessors. A new contract with Timken was entered into as of January 1, 1935, and a third contract with Timken was entered into as of October 1, 1941. In all three contracts Automotive was barred from making any further licensing agreements with respect to the patents and multiwheel units and axles referred to in the contracts without Timken's consent.
Shortly after Emory Winship's death in 1931 petitioner Henry Dillon Winship became president of Automotive.
The royalties received by Automotive in the years 1931 to 1942, inclusive, were as follows:
1931 ................................ $3,427.14 1932 ................................ 2,117.43 1933 ................................ 7,997.42 1934 ................................ 5,802.50 1935 ................................ 3,323.53 1936 ................................ 3,634.24 ................................ 6,125.30 1938 ................................ 4,377.44 1939 ................................ 5,222.50 1940 ................................ 29,940.00 1941 ................................ 82,604.50 1942 ................................ 365.00
In October 1941 Automotiveentered into a new contract with Timken Detroit Axle Co., modifying its previous contract of January 1, 1935. The agreement set up a schedule of royalties and provided that it superseded all other contracts that previously existed between the parties, and that it was to be interpreted without reference to any earlier formal agreement, even though it was, in effect, a continuation of the same. The agreement also provided that the obligation to sue infringers of the patents was to rest solely on Timken unless Automotive should elect to assume all or part of such obligation in any instance.
Prior to 1942 Automotive had also acquired other patents, pertaining to hydraulic transmissions and pumps. These patents were generally of little value. No royalties had ever been received on these patents.
During the calendar year 1941 Automotive declared and paid dividends to its stockholders.
In February 1942 Automotive was served with an order of the War Department to turn over certain patents and assets, including its licensing agreement, under an offer of contract to be entered into between the War Department and Automotive calling for the payment by the Government of $250,000 for the assets to be taken over. This order and offer was accepted by petitioner Henry Dillon Winship, as president of the company, on February 13, 1942. A contract in final form was subsequently entered into whereunder the rights of Automotive were taken over by the War Department as of January 1, 1942, and the purchase price of $250,000 was paid to Automotive on June 8, 1942. Automotive distributed $85,791.78 to petitioners Henry Dillon Winship and Katherine Winship Hayes on December 31, 1942.
On December 30, 1942, Automotive sold its remaining patents and assets not taken over by the War Department for the sum of $750. On December 31, 1942, Automotive was dissolved.
Between July 1, 1941, and June 30, 1942, Automotive paid salaries as follows:
Henry Dillon Winship, president ................. $3,600 Katherine Winship Hayes, vice president ......... 600 Anne Winship, secretary ......................... 600 T. T. Taylor, treasurer ......................... 360
Automotive also paid a stenographer $10 a month for part time work and the office rental of $25 a month to the second inter vivos trust.
In 1941 and 1942 Automotive paid fees to patent attorneys in the respective sums of $364.06 and $682.31.
In its income tax return for the calendar year 1942 Automotive deducted legal expenses and traveling expenses in the respective sums of $1,526.25 and $362.82.
In its 1942 return of capital stock tax for the year ended June 30, 1942, Automotive claimed exemption of the tax on the ground that it was not doing business. For the calendar year 1942 Automotive, therefore, claimed exemption from the declared value excess profits tax.
Respondent rejected Automotive's claim for exemption from the capital stock tax and determined that Automotive was subject to declared value excess profits tax.
Petitioners Henry Dillon Winship and Katherine Winship Hayes concede that they are liable as transferees for any deficiency in tax of Automotive Engineering Corporation.
OPINION.
Issue I. — The question under this issue relates to the individual income tax liability of Henry Dillon Winship for the taxable year 1941. Respondent determined that petitioner was not entitled to a deduction in 1941 for a carry-over of a net operating loss sustained in 1940. In 1940 petitioner, as executor of his father's estate, sold all the remaining assets of the estate. Petitioner contends that at that time the estate of his father was indebted to the revocable trust, which he and his sister set up, in the sum of $130,029.36. This sum represented moneys which the father had advanced to himself when he was executor of the estate of petitioner's mother and as trustee of the testamentary trust. It also represented moneys advanced to the father and to the father's estate by the first and second inter vivos trusts.
The moneys advanced to the father had been charged on the books of the estate and trusts to the personal account of the father. The advancements extended back to the time of the death of petitioner's mother in 1920. In 1930 a balance was struck by petitioner, his sister, and his father, under which they agreed that the father owed to the first inter vivos trust which petitioner and his sister set up the sum of approximately $61,500. Prior to his death in 1931, the father became indebted to the trust in the further amount of approximately $51,000, and the remaining $17,000 represented money advanced by the trust to the estate of the father and interest at the rate of 6 per cent on the unpaid balance.
Although the father died in 1931, petitioner claims that the debt was a valid obligation and enforceable against the estate of the father up until the time the estate disposed of all of its assets in 1940 for a little over $1,000. At this time, claims petitioner, the debt became worthless and allowable as a deduction for the revocable trust which he and his sister had set up in 1939. The parties are agreed that since the trust was revocable the deductions allowable to the trust are allowable to petitioner in his individual capacity. Petitioner contends, therefore, that the bad debt deduction in 1940 was a net operating loss deduction, one-half of which was allocable to him as one of the two grantors of the revocable trust, and that he is entitled to carry over such deduction for purposes of computing his 1941 income tax liability.
Respondent, on the other hand, contends that the debt became worthless prior to 1940. In addition, he argues that the bad debt deduction, even if the claim against the father was considered valid in 1940, was not attributable to the operation of a trade or business regularly carried on by either the revocable trust or petitioner as an individual. Under such circumstances, he claims that the net operating loss deduction for 1940 is allowable under section 122 (d) (5) of the Internal Revenue Code only to the extent of the amount of gross income not derived from such trade or business. It appears that this limitation would allow petitioner no net operating loss carry-over for the year 1941.
We think that respondent's position is correct. Even assuming, arguendo, that the claim against the estate of petitioner's father was not barred by the statute of limitations or voluntarily abandoned by petitioner and his sister, it seems perfectly clear that the claim for which the bad debt deduction was sought was in no way attributable to the operation of a trade or business regularly carried on by petitioner individually or by the revocable trust of which he was a grantor. The father apparently invested the funds which were advanced to him in corporations which he organized for developing patents and for mining and marketing mineral deposits. But neither petitioner nor the trusts had any interest in the corporations or in what the father did with the money given to him. This is not a case where the trusts lost money in managing the various real estate holdings comprising the corpus of the trusts. Any business which the father carried on with the money advanced to him was his own and can not be attributable either to the trusts or to petitioner. This is evident from the fact that petitioner treats the $130,020.36 as a debt owed by the father to the trusts, and not as a loss from the operations of any of the corporations. Accordingly, even assuming that one-half of the $130,029.36 was deductible by petitioner in his 1940 income tax return as a bad debt, this could only offset gross income not derived from a trade or business regularly carried on, for purposes of computing the net operating loss carry-over under section 122.
It is held that petitioner is entitled to no net operating loss carryover deduction for the calendar year 1941.
Issue II. — This issue also relates to the individual income tax liability of petitioner Henry Dillon Winship. The question is whether dividends which petitioner received from Automotive Engineering Corporation in 1941 were taxable solely to petitioner as separate income, or taxable one-half to petitioner and one-half to his wife as community income. This depends on whether petitioner owned the Automotive stock as separate property or community property.
Petitioner was married and domiciled in California prior to the taxable year. The stock in question was part of the estate of petitioner's deceased father. Petitioner was one of the three principal legatees under the will of his father. Petitioner was also executor of the estate. There is no question that, if petitioner, as executor, had distributed the stock to the legatees under the will, he would have acquired his interest by bequest and the stock would have constituted his separate property under California law. However, petitioner did not distribute the stock as part of the estate of his father. Instead he caused it to be sold and purchased on behalf of himself and his sister for the bid price of $1,000.
The sale took place in 1940. Petitioner was designated on the books of the corporation as the owner of 475 shares of the 950 shares sold; the other shares were placed in the name of his sister. In 1941 the dividends which give rise to the present controversy were declared and paid by the corporation.
At the time petitioner received the dividend income in question he had, under his own testimony and the evidence in the record, not made any payment whatsoever for the stock. It was not until 1943, after his 1941 income tax return was under examination, that petitioner claims to have paid for the stock by paying attorney and accounting fees in connection with his father's estate in the approximate sum of $1,500. These fees were paid by petitioner's personal checks, which were drawn on a bank account which contained an undisclosed sum representing in part salaries of petitioner, some of the dividends in question, and the proceeds from the sale of the Automotive stock. Petitioner's sister apparently reimbursed him for part of the fees paid as her contribution to the cost of the stock.
Respondent determined that petitioner had not acquired the stock as community property prior to or during the taxable year 1941.
Petitioner claims that the stock was not acquired by gift or devise and claims that respondent has offered no testimony whatsoever to overcome the presumption that the stock acquired was community property.
It seems clear that, in so far as the taxable year 1941 is involved, petitioner must rely solely on the presumption in the California law that property acquired during the marriage is community property unless it is acquired by gift, devise, or purchase with the proceeds of separate property. Alanson Weeks, 31 B. T. A. 627. The payment of the attorney and accounting fees is of doubtful materiality. The payment was made after the taxable year and at a time when the taxpayer's 1941 income tax return was under examination. Moreover, it has not been shown to what extent the funds in the bank account on which the checks were drawn represented petitioner's separate or community property. It is true that salaries of petitioner were deposited in the account, but the account also reflected deposits of the dividends and proceeds from the sale of the Automotive stock, the nature of which is the question at issue. The source of the payments, therefore, is not sufficient evidence to overcome the presumption of correctness of respondent's determination. Shea v. Commissioner, 81 F.2d 937.
Moreover, we do not think the situation falls within the ambit of those cases which hold that the acquisition of property on credit in California is presumed to be purchased on community credit and, therefore, community property. See Alanson Weeks, supra; Bechtel v. Commissioner, 34 B. T. A. 824. In the instant case, petitioner never intended to, nor did he, purchase the Automotive stock on credit. His failure to pay for the stock immediately can be explained, in part only, for the reason that he was the executor to whom payment was to be made. The stock was worth more than one hundred times the amount which petitioner paid for it. He and his sister were rightfully entitled to two-thirds of the stock by inheritance and he must have believed that the purchase for the nominal amount of $1,000 was an easy way to facilitate distribution of the stock, even though, in fact, it cut out the rights of the third legatee under the will. In any event, regardless of petitioner's motives, all petitioner can point to in the taxable year 1941 is that he had acquired the Automotive stock after his marriage. Although technically he may not have acquired it by gift or bequest, he also did not acquire it by the use of community funds or community credit. Since the stock was worth so much more than the price at which petitioner bid it in, there is just as much an element of gift from himself as executor to himself as an individual as there is a purchase. Under such circumstances, even if conflicting presumptions exist, the determination of the Commissioner must prevail. J. Z. Todd, 3 T.C. 643; affirmed and remanded, 153 F.2d 553.
It is held that the respondent's determination that petitioner was taxable on all the dividends received from Automotive Engineering Corporation in the calendar year 1941 as separate income is sustained.
Issue III. — This issue relates to the transferee liability of petitioner Henry Dillon Winship and petitioner Katherine Winship Hayes. Petitioners concede that they are liable as transferees for any deficiency in tax of the Automotive Engineering Corporation. The question is whether Automotive was liable for a declared value excess profits tax for the calendar year 1942. This depends on whether Automotive was carrying on or doing business for any part of the year ended June 30, 1942, so as to be subject to the capital stock tax. Rotorite Corporation, 40 B. T. A. 1304; reversed on other grounds, 117 F.2d 245.
Automotive was organized in 1930 by petitioner's father, Emory Winship. In the formation of the corporation Emory Winship transferred to the corporation various patents held by him and the Eight Wheel Motor Vehicle Co. relating to multiwheel vehicles in exchange for all of the corporate stock. The main purpose for which the corporation was organized was to license the use of these patents to other companies for royalties.
The crucial period involved is July 1, 1941, to June 30, 1942. To be subject to the capital stock tax the corporation must actually have been carrying on or doing business during any part of this period. Sears v. Hassett, 111 F.2d 961.
In October 1941, which is within the period in question, Automotive entered into a licensing agreement with the Timken Detroit Axle Co., whereby Timken agreed to pay Automotive royalties in return for the exclusive right to use, manufacture, and sell multiwheel units or other equipment embodying the patents and inventions belonging to Automotive. From 1932 on, Timken had been about the only source of revenue for Automotive. The 1941 contract was a modification of the contract previously existing between Automotive and Timken which had been entered into in 1935.
The October 1941 Timken-Automotive licensing agreement did not cover all the patents held by Automotive. Petitioner had acquired other patents, pertaining to hydraulic transmissions and pumps. These patents were generally of little value. No royalties had ever been received on these patents. However, in October 1941 Automotive still maintained an organization capable of marketing these products.
It was not until February 1942 that Automotive was served with an order of the War Department to turn over the patents and assets covered by its licensing agreement with Timken to the Government, and it was not until later in the year 1942 that the company decided to liquidate and dissolve.
Automotive was organized for profit. It was organized for the purpose of licensing its patents and receiving the royalties for the benefit of its shareholders. In making the October 1941 licensing agreement with Timken, under which Automotive received its only source of revenue prior to the sale and disposal of its assets, Automotive was doing exactly what it was organized to do. As was said by the court in Section Seven Corporation v. Anglin, 136 F.2d 155:
If a corporation is organized for profit and was doing what it was principally organized to do in order to realize profit, no special volume of business is necessary to bring it within the taxing act — a very slight activity may be deemed sufficient to constitute "doing business."
The making of the October 1941 licensing agreement was doing or carrying on business. It required the exercise of business judgment. Although a licensing agreement previously existed between Automotive and Timken, the new agreement was nevertheless a modification of the old and was expressly to be interpreted without reference to the earlier agreement. Having made a contract which constituted its only source of revenue during the period in question, Automotive can not say that in doing what it was expressly authorized and organized to do it was not carrying on or doing business for profit. Section Seven Corporation v. Anglin, supra.
In addition, Automotive held itself in readiness to market and license its other patents which were not covered by the Timken agreement. It claimed business expense deductions in the returns which it filed during the period. Under all the circumstances, we are of the opinion that its activities consisted of more than receiving royalties and distributing them to its stockholders. Cf. Rotorite Corporation, supra. Hence, the regulation upon which petitioners rely to the effect that a corporation is not doing business if it has retired from the business for which it was organized and has reduced its activities to the mere ownership and holding of property and the distribution of its avails, is not applicable. Petitioner had not retired from the business for which it was organized. It was organized to make licensing agreements and this is what it did during the period in question.
It is held that Automotive was carrying on or doing business during the one year period ended June 30, 1942, so as to be subject to the capital stock tax. Since Automotive was subject to the capital stock tax, it is also subject to the declared value excess profits tax for the calendar year 1942. Respondent's determination that petitioners are liable as transferees of the Automotive Engineering Corporation for the deficiency in declared value excess profits tax for the calendar year 1942 is sustained.
An issue raised in the petition that the $130,029.36 owed by Emory Winship to petitioners entered into the cost basis of the patents sold by Automotive to the Government in 1942 has been abandoned by petitioners on brief.
Decisions will be entered for the respondent.