Respondent has determined deficiencies in the income tax of petitioners as follows: Docket Petitioner Period Deficiency No. {1955 $8,088.40 88886 Interior Securities Corp. .......... {1956 6,684.82 {1957 6,871.85 88887 Jacwill, Inc. ...................... {Aug. 31, 1956 3,626.40 {Aug. 31, 1957 4,590.16 88888 Wellworth Realty Corp. ............. {1955 14,495.04 {1956 9,439.65 {1957 12,397.03 {1955 928.13 88889 Elsia Company ...................... {1956 1,115.68 {1957 1,667.20 The cases have been consolidated because of the identical question presented. The issues are: (1) Whether the corporate petitioners reserved such enjoyment, dominion, and control over rental properties owned by them as to make the entire net income derived therefrom taxable to them under the provisions of section 61 of the 1954 Code. (2) If we should hold against respondent on this phase of the case, then in the alternative whether the respondent, pursuant to the authority of section 482 of the 1954 Code, may allocate or apportion the gross income and deductions of a family partnership to the corporate petitioners on the facts of the case, he having determined that such allocation or apportionment is necessary in order clearly to reflect their income.
FINDINGS OF FACT.
A stipulation of facts and a supplemental stipulation of facts to which certain exhibits are attached were filed by the parties and are incorporated herein by this reference. An oral stipulation was also entered into by the parties during the hearing by which it was agreed that none of the corporate petitioners had ever paid a dividend.
Petitioners Interior Securities Corp., Jacwill, Inc., Wellworth Realty Corp., and Elsia Company, somethimes hereinafter called Interior, Jacwill, Wellworth, and Elsia, respectively, are corporations organized and existing under the laws of the State of New Jersey with principal places of business at Paterson, New Jersey. They filed their income tax returns with the district director of internal revenue, Newark, New Jersey. The petitioners use the cash method of accounting. All petitioners use the calendar year as their annual accounting period except Jacwill which reports on the basis of a fiscal year ended August 31.
Wellworth, Interior, Elsia, and Jacwill were incorporated respectively in 1921, 1932, 1940, and 1943. They are engaged in the rental realty business and real property constitutes their major assets. The rental properties owned by these corporations are as follows:
Wellworth: 71-73 Main Street, Paterson 28 Main Street, Paterson 60 River Street, Paterson 135-141 Broadway, Paterson 540 East 23rd Street, Paterson 409-411 Tenth Avenue, Paterson 61-63 Clark Street, Paterson 78-80 Fair Street, Paterson 35 McKinley Avenue, Hawthorne
Interior: 111-113 Main Street, Hackensack 93-95 Main Street, Paterson 337-339 Main Street, Paterson 261-263 Main Street, Paterson 102 Broadway, Paterson
Elsia: 21-27 Auburn Street, Paterson 349-351 Fair Street, Paterson
Jacwill: 288 Graham Avenue, Paterson 44-48 Twelfth Avenue, Paterson
For the periods here involved petitioners' stockholders were as follows: Wellworth Jacwill Number Number of Date issued of Date issued shares shares Helen Levine ...... 21 July 1, 1932 19 Sept. 3, 1943 Rosalind Altshuler (Brenman) ........ 21 July 1, 1932 19 Sept. 3, 1943 Sylvia Altshuler (Krugman) ........ 21 July 1, 1932 19 Sept. 3, 1943 Harold P. Altshuler ........ 21 July 1, 1932 19 Sept. 3, 1943 Kenneth Z. Altshuler ........ 21 July 1, 1932 19 Sept. 3, 1943 Altie Altshuler ... 1 July 1, 1932 4 Sept. 3, 1943 Jacob Altshuler ... 1 July 1, 1932 1 Sept. 3, 1943 Ethel Altshuler (Kulick) ......... 21 July 1, 1932 19 Sept. 3, 1943 Adeline Altshuler (Simons) ......... 21 July 1, 1932 19 Sept. 3, 1943 Shirley Altshuler (Gorens) ......... 21 July 1, 1932 19 Sept. 3, 1943 Florence Altshuler (Rafey) .......... 21 July 1, 1932 19 Sept. 3, 1943 Barbara Altshuler (Stern) .......... 21 July 1, 1932 19 Sept. 3, 1943 Rebecca Altshuler ........ 1 July 1, 1932 4 Sept. 3, 1943 William Altshuler ........ 1 July 1, 1932 1 Sept. 3, 1943 ----- ----- 214 200 Interior Elsia Number Number of Date issued of Date issued shares shares Helen Levine ...... 29 Jan. 2, 1933 20 May 29, 1940 Rosalind Altshuler (Brenman) ........ 29 Jan. 2, 1933 20 May 29, 1940 Sylvia Altshuler (Krugman) ........ 29 Jan. 2, 1933 20 May 29, 1940 Harold P. Altshuler ........ 29 Jan. 2, 1933 20 May 29, 1940 Kenneth Z. Altshuler ........ 29 Jan. 2, 1933 20 May 29, 1940 Altie Altshuler ... 2 July 20, 1932 5 May 29, 1940 Jacob Altshuler ... 1 July 20, 1932 2 May 29, 1940 Ethel Altshuler (Kulick) ......... 29 Jan. 2, 1933 20 May 29, 1940 Adeline Altshuler (Simons) ......... 29 Jan. 2, 1933 20 May 29, 1940 Shirley Altshuler (Gorens) ......... 29 Jan. 2, 1933 20 May 29, 1940 Florence Altshuler (Rafey) .......... 29 Jan. 2, 1933 20 May 29, 1940 Barbara Altshuler (Stern) .......... 29 Jan. 2, 1933 20 May 29, 1940 Rebecca Altshuler ........ 2 July 20, 1932 5 May 29, 1940 William Altshuler ........ 1 July 20, 1932 2 May 29, 1940 ----- ----- 296 214 None of the petitioners had preferred stock issued or outstanding. The 14 shareholders of petitioners are related by blood or by marriage. Jacob and William Altshuler were brothers. Their wives and five children of each constitute the other shareholders. William died on December 27, 1954, and the stock he formerly had is held by his estate.
A partnership known as J W Altshuler was organized in 1919 by Jacob and William Altshuler. The partnership leased the rental properties owned by Wellworth, Interior, and Elsia. At the time of William's death there were in effect leases for terms of 9 years effective January 1, 1947, unless sooner terminated by death of one of the lessees, leasing the rental properties of Wellworth, Interior, and Elsia to the partnership. There was no lease between the partnership and Jacwill. After the death of William a new partnership agreement was executed whereby Albee Company was formed. The partnership agreement of Albee Company provided as follows:
THIS AGREEMENT, effective January 1, 1955 by and between the parties hereto, more specifically referred to in Paragraph #3 below:
WITNESSETH:
1. The parties do hereby form a partnership under the name of ALBEE CO. for the purpose of leasing real estate and managing the same, and engaging in the business commonly referred to as the real estate management business.
2. The partnership shall commence on January 1, 1955 and shall continue until December 31, 1955 and thereafter from year to year unless terminated as provided for herein.
3. The capital as shall be required for the operation of the partnership shall be contributed by the partners in the following percentages:
JACOB ALTSHULER — Four (4%) percent REBECCA ALTSHULER — Four (4%) percent MORTON KULICK — One (1%) percent MARTIN KRUGMAN — One (1%) percent ETHEL KULICK — Nine (9%) percent ADELINE SIMONS — Nine (9%) percent SHIRLEY GORENS — Nine (9%) percent FLORENCE RAFEY — Nine (9%) percent BARBARA STERN — Nine (9%) percent HELEN LEVINE — Nine (9%) percent ROSALIND BRENMAN — Nine (9%) percent SYLVIA KRUGMAN — Nine (9%) percent HAROLD P. ALTSHULER — Nine (9%) percent KENNETH Z. ALTSHULER — Nine (9%) percent
The foregoing represents undivided interests in the assets subject to the liabilities.
4. The net profits of the partnership shall be divided and the net losses of the partnership shall be borne in the same portions as set forth in Paragraph #3 above.
5. It is specifically agreed between the parties that JACOB ALTSHULER, REBECCA ALTSHULER, MORTON KULICK and MARTIN KRUGMAN, shall devote their time and attention to the partnership business and that in consideration therefore the partners guarantee to each of the said partners a salary as set forth below, which shall be paid and shall be charged against their proportionate interests in the profits of the partnership; that is to say, that the following amounts shall represent a charge upon the assets of the partnership prior to the allocation of profits to the remaining partnership interests:
JACOB ALTSHULER — $12,500.00 for the first year and $15,000.00 for each year thereafter. REBECCA ALTSHULER — $12,500.00 for the first year and $15,000.00 for each year thereafter. MORTON KULICK — $5,000.00 per year. MARTIN KRUGMAN — $5,000.00 per year.
6. The partners shall have such drawing accounts as may be agreed upon between them, but the drawings of each shall be charged against his or her share in the net profits.
7. The partnership business shall be managed by the working partners. All checks, drafts, notes, leases or other documents signed on behalf of the partnership, shall be signed by JACOB ALTSHULER or MARTIN KRUGMAN and REBECCA ALTSHULER or MORTON KULICK, it being the intention that each such document or evidences of obligation shall be signed by at least two (2) of the aforegoing.
8. All funds of the partnership shall be deposited in such checking account or accounts as shall be designated by the working partners.
9. The partnership books shall be maintained at the prinicpal office of the partnership, located at #262 Main Street, Paterson, New Jersey, and each partner shall at all times have access thereto.
10. No partner shall, except with the consent of the other partners, assign, mortgage, or sell his share in the partnership or in its capital assets or property, or enter into any agreement as a result of which any person shall become interested with him in the partnership, or do any act detrimental to the best interests of the partnership or which would make it impossible to carry on the ordinary business of the partnership. The estate of a deceased partner shall have no voice in the management of the partnership business. Its rights shall be limited to the receipt of such payments as shall be provided for herein to be paid to the decedent.
11. The withdrawal or death of any partner shall not terminate the partnership, but the rights of the withdrawing partner or the heirs of the deceased partner shall be limited solely to the receipt of payment of such moneys as would have been received by the deceased partner had he or she survived.
12. Upon any liquidation of the partnership business, the partners including the estate of any deceased partner, shall continue to share in the net profits and losses in the proportionate share as set forth herein. The proceeds of the liquidation shall first be paid in discharge of all partnership liabilities, thereafter in the equalization and payment of undrawn partnership profits and finally in proportionate distributions against the respective balances in the capital accounts of the partnership.
13. This agreement shall be binding upon and inured to the benefit of the partners, their legal representatives, successors and assigns.
[Here follow the signatures of all the partners, signed on the 12th day of January 1955.]
The partners of Albee Company are related by blood or by marriage and consist of Jacob Altshuler, Rebecca Altshuler (William's widow), the 10 children of Jacob and William, and the husbands of 2 of the children. No capital was contributed to the partnership by any of the partners.
Effective January 1, 1955, Albee Company executed leases whereby it undertook to lease the real properties owned by all the corporate petitioners from them. The leases between Albee Company and the four corporations were identical as to terms, differing only in respect to the description of the leased premises and the rentals to be paid. The lease between Interior and Albee Company is typical and provided as follows:
THIS LEASE, effective January 1, 1955 by and between INTERIOR SECURITIES CORP., A Corporation of the State of New Jersey, as "Landlord" and ALBEE CO., A Partnership with offices at #262 Main Street, Paterson, New Jersey, as "Tenant"
WITNESSETH, that the said Landlord has let unto the said Tenant, and the said Tenant has hired from the said Landlord, the following premises: 111-113 Main Street, Hackensack, New Jersey; 93-95 Main Street, Paterson, New Jersey; 337-339 Main Street, Paterson, New Jersey; 261-263 Main Street, Paterson, New Jersey and #102 Broadway, Paterson, New Jersey for a period of three (3) years, and from year to year thereafter, unless terminated by either party giving to the other thirty (30) days' notice of their intention so to do, upon the conditions and covenants following:
1st: That the Tenant shall pay the annual rent of Sixteen Thousand Eight Hundred ($16,800.00) Dollars; said rent to be paid in equal monthly payments of One Thousand Four Hundred ($1,400.00) Dollars, on the 1st day of each and every month, in advance.
2nd: That the Tenant shall take good care of the premises and shall at the Tenant's own cost and expense make all repairs to the interior and exterior of the demised premises, and at the end or other expiration of the term, shall deliver up the demised premises in good order or condition, damages by the elements excepted.
3rd: That the Tenant shall promptly execute and comply with all Statutes, ordinances, rules, orders, regulations and requirements of the Federal, State and City Government and of any and all their Departments and Bureaus applicable to said premises, for the correction, prevention and abatement of nuisances, violations or other grievances, in, upon or connected with said premises during said term; and shall also comply with and execute all rules, orders and regulations of the Board of Fire Underwriters for the prevention of fires, at the Tenant's own cost and expense.
4th: The Tenant shall not assign this agreement, without the prior written consent of the Landlord, or occupy or permit or suffer the same to be occupied by anyone for any business or purpose deemed disreputable or extra-hazardous on account of fire, under penalty of damages and forfeiture.
5th: That in case of any damage or injury occurring to the glass in the said demised premises, or damage and injury to said premises of any kind whatsoever, then the said Tenant shall cause the said damage or injury to be repaired as speedily as possible at Tenant's own costs and expenses.
6th: It is expressly agreed and understood by and between the parties to this agreement, that the Landlord shall not be liable for any damage or injury to person or property caused by or resulting from steam, electricity, gas, water, rain, ice or snow, or any leak or flow from or into any part of said building, or from any damage or injury resulting or arising from any other cause or happening whatsoever.
7th: It is expressly agreed and understood that if for any reason it shall be impossible to obtain fire insurance on the buildings and improvements on the demised premises in an amount, and in the form, and in fire insurance companies acceptable to the Landlord, the Landlord may, if the Landlord so elects, at any time thereafter terminate this lease and the term thereof, on giving to the Tenant three days' notice in writing of Landlord's intention so to do and upon the giving of such notice, this lease and the term thereof shall terminate and come to an end.
8th: It is understood and agreed that the Tenant herein will keep the buildings demised herein insured for liability and fire insurance, in such amounts and with such companies as the Landlord shall require.
9th: That should the land whereon the said buildings stand or any part thereof be condemned for public use, then in that event, upon the taking of the same for such public use, this lease, at the option of the Landlord, shall become null and void, and the term cease and come to an end upon the date when the same shall be taken and the rent shall be apportioned as of said date. No part of any award, however, shall belong to the Tenant.
AND the said Landlord doth covenant that the said Tenant on paying the said yearly rent, and performing the covenants aforesaid, shall and may peacefully and quietly have, hold and enjoy the said demised premises for the term aforesaid, provided, however, that this covenant shall be conditioned upon the retention of title to the premises by the Landlord.
AND it is further understood and agreed, that the covenants and agreements herein contained are binding on the parties hereto and upon their respective successors, heirs, executors and administrators.
[Here follow the signatures of Interior Securities Corp., as lessor, and the Albee Company partnership, as lessee.]
The leases between Albee Company and the corporations covered the following properties and provided for rents to be paid by Albee Company as follows:
Wellworth: 71-73 Main Street, Paterson 28 Main Street, and 60 River Street, Paterson 135-141 Broadway, Paterson 540 East 23d Street, Paterson 409-411 Tenth Avenue, Paterson 61-63 Clark Street, Paterson 78-80 Fair Street, Paterson 35 McKinley Avenue, Hawthorne
Rents:
Jan. 1, 1955-May 31, 1956 ............... $28,800 annually June 1, 1956 ............................ 30,000 annually
Interior: 111-113 Main Street, Hackensack 93-95 Main Street, Paterson 337-339 Main Street, Paterson 261-263 Main Street, Paterson 102 Broadway, Paterson
Rent:
Jan. 1, 1955 ........................... $16,800 annually
Elsia: 21-27 Auburn Street, Paterson 349-351 Fair Street, Paterson
Rent:
Jan. 1, 1955 ........................... $7,200 annually
Jacwill: 288 Graham Avenue, Paterson 44-48 Twelfth Avenue, Paterson
Rents:
Jan. 1, 1955-May 31, 1956 .............. $27,600 annually June 1, 1956 ........................... 26,400 annually
The gross annual rents collected by Albee Company from the tenants to whom it sublet the rental properties were as follows: Properties leased from Interior: 1955 1956 1957 261-263 Main Street ................. $6,544.00 $4,542.69 $7,500 102 Broadway ........................ 7,200.00 7,200.00 6,000 93 Main Street ..................... 9,000.00 9,000.00 8,600 111 Main Street ..................... 16,425.00 14,100.00 15,425 337 Main Street ..................... 9,400.60 10,846.31 10,845 --------- --------- ------ Total .......................... 48,569.60 45,689.00 48,370 Properties leased from Elsia: 349 Fair Street ..................... 7,630.32 7,690.20 8,788 21 Auburn .......................... 9,006.40 9,500.60 11,047 --------- --------- ------ Total .......................... 16,636.72 17,190.80 19,835 Properties leased from Wellworth: 1955 1956 1957 28 Main Street ...................... $4,529.60 $4,487.61 $4,205 71 Main Street ...................... 6,900.00 1,650.00 3,675 35 McKinley ......................... 27,349.47 28,252.50 29,999 409 Tenth ............................ 7,796.20 8,163.00 9,155 540 East 23rd ........................ 7,417.85 7,672.80 8,467 61 Clark ............................ 14,645.40 14,476.71 16,630 141 Broadway ......................... 3,185.00 3,440.00 2,790 135 Broadway ......................... 16,286.00 15,604.25 16,251 --------- --------- ------ Total .......................... 88,109.52 83,746.87 91,172 Fiscal year ended Aug. 31 — Properties leased from Jacwill: 1956 1957 44 Twelfth Avenue .................... $10,917.40 $11,518.00 288 Graham ............................ 46,675.06 52,323.50 _________ _________ Total ............................ 57,592.46 63,841.50 The total gross rents collected by Albee Company from the tenants were $210,142.92, $205,654.08, and $224,212 for 1955, 1956, and 1957, respectively.
The expenses incurred (exclusive of rental payments to the petitioners) by Albee Company for the operation and management of the rental properties were $48,056.01, $59,221.64, and $66,015 for 1955, 1956, and 1957, respectively.
Pursuant to the terms of the lease agreements the total rentals payable to the corporate petitioners were $80,400 annually for each of the years 1955, 1956, and 1957.
The reported gross receipts and taxable income of the corporate petitioners were as follows: 1955 1956 1957 Gross Net Gross Net Gross Net Interior ..... $16,800 $1,913.74 $16,800 $1,463.54 $17,109 $1,510.01 Jacwill ..... 27,300 3,009.31 26,400 703.79 Wellworth .... 28,800 1,395.81 29,500 1,057.82 30,168 439.38 Elsia ........ 7,200 1,773.73 7,200 1,325.44 7,200 1,302.33 The reported gross receipts (rentals) and taxable income of Albee Company were as follows: Year Gross Net 1955 ................................... $210,142.92 $81,686.91 1956 ................................... 205,654.08 66,032.44 1957 ................................... 224,212.00 78,187.00 During the years here involved Albee Company collected the rents on the real properties owned by the petitioners from its tenants and paid the operating expenses. Albee Company then paid a monthly rental to the petitioners pursuant to the leasehold agreements and reported the remaining income as partnership profits. The corporations claimed deductions of taxes and depreciation as the owners of the respective properties.
With respect to the partnership Albee Company, Rebecca Altshuler and Jacob Altshuler are considered to be the senior partners. No major capital expenditure is made without checking with them. Morton Kulick and Martin Krugman are also active and these two partners, together with Rebecca and Jacob, are guaranteed a salary from Albee Company. Generally a Friday morning meeting is held to discuss partnership business. The participants at these meetings usually include Kulick, Krugman, and any of the other partners who happen to be available. Rebecca reviews each decision that is made by Kulick and Krugman.
OPINION.