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First Mechanics Bank of Trenton v. Commissioner of Internal Revenue

June 29, 1937


Petition to Review the Decision of the United States Board of Tax Appeals.

Author: Davis

Before BUFFINGTON, DAVIS, and THOMPSON, Circuit Judges.

DAVIS, Circuit Judge.

This is an appeal from an order of the Board of Tax Appeals holding the petitioners liable for a deficiency of $20,179.53 in the income tax return of J. Philip Bird, for the year 1928.

The liability of the petitioners for the alleged deficiency depends upon the nature of the relationship between J. Philip Bird and the Canadian Car & Foundry Company, Ltd., hereinafter called the Canadian Company. If Bird was an employee, as the Board found, then its order should be affirmed. If, however, he was a partner or joint adventurer with the Canadian Company, then the petitioners are not liable for the alleged deficiency, and the order of the Board should be set aside.

The facts were stipulated by the parties. Bird "had been engaged in the manufacturing business since his early youth and in 1914 not only was a manufacturer but also was the general manager of the National Association of Manufacturers and enjoyed a very wide acquaintance among American manufacturers."

In the fall of 1914 he "obtained a contract to sell to the Imperial Russian Government 1,000,000 three inch shrapnel shells complete, at the price of $12.50 each. Up to the time of his contract all ammunition of that nature had been manufactured in the United States only at the Government's arsenals and there was no existent private manufacturer in our country which either was in that business or was capable of undertaking such a contract."

Bird, however, was in a position to complete the contract because of his wide acquaintance with manufacturers. He "employed engineers and draftsmen to prepare complete, detail working drawings of the various component parts of the shell" and "peddled out" the work of making the component parts and final assemblage among "some sixty to seventy American manufacturers." He had used this system to fulfill a contract with the United States Post Office Department for a complicated machine comprising several hundred parts "with such success that he received a bonus for completing the contract short of the fixed time."

While Bird was performing this contract, the Allison Supply Group (with which the taxpayer then had no connection) entered into a contract with the Russian government for 2,000,000 identical shells at $17.50 each. This contract was sold to the Canadian Company. In January, 1915, representatives of the Canadian Company came to the United States and endeavored to find American manufacturers who could perform the contract for them, as the Canadian Company had no plant or organization of its own which was capable of making the shells. After spending a month in New York without success, they were ready to leave and abandon their contract. They then learned of the contract of Mr. Bird, and of how he intended to solve the problem of supplying the shells.

"Accordingly, the representatives of the Canadian Company entered into negotiations with the taxpayer for the pooling of their interests on the precedent condition that the taxpayer would obtain the cancellation of his contract for the 1,000,000 shells at the lower price. The taxpayer so arranged, and it was then agreed that the taxpayer would turn over all of his property and organization that he had acquired and perfected including drawings, tools, gauges, arrangements made with the American component-parts manufacturers and everything connected with his contract; he was then to assist in the performance of the 2,000,000 shell contract and any other contracts that the Canadian company might obtain, during the year following, with the Russian Government; the taxpayer was to participate in the profits from all such contracts on the basis of 15 per cent. of the profits from the contract for the 2,000,000 shells and 5 per cent. of the profits from any other such contracts so obtained within one year. The taxpayer performed his part of the agreement. * * *"

An American corporation called "Agency of the Canadian Car & Foundry Company, Limited" was formed to which the 2,000,000 shell contract was assigned. Bird was made a director, general manager, and a member of a special committee in charge of matters relating to the 2,000,000 shell contract.

The Canadian Company also received a contract for 2,500,000 high explosive shells and 500,000 shrapnel which was turned over to the American corporation and in which Bird was entitled to a 5 per cent. share of the profits under the contract.

"In the Spring of 1916, due to financial reorganization and the responsibility of the British Government for the conduct of the finances of the Russian Government, the British insisted that an army officer be placed in immediate charge of the performance of the contracts and accordingly, the taxpayer was removed from any official position with the 'Agency.' However, under his contract connection with the contract performance the taxpayer continued to the conclusion of the Russian contracts in co-operation with the army officer and with the officials of the Canadian company, assisting in the performance of the shrapnel and shell contracts. The facilities of the taxpayer that he had provided for the performance of his 1,000,000 shell contract, were utilized by the Canadian company and the 'Agency' in the performance of the contract for the 2,000,000 shells. * * *"

Deliveries under the 2,000,000 shell contract were completed in 1916. The manufacture of the 2,500,000 high explosives and 500,000 shrapnel was completed in January, 1917, but while awaiting shipment they were ...

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