Determining Gross Income for Personal Holding Company With Certain Division Gross Receipts

The taxpayer has requested a ruling to the effect that:

In abbreviated form, the pertinent facts are that * * * is a * * * corporation organized on December 21, 1959, all of the stock of which is owned directly or indirectly by a trust created by * * * on June 3, 1932. On December 30, 1959, it acquired in a statutory merger all of the assets and assumed all of the liabilities of * * *, a * * * corporation, and * * *, a * * * corporation. Prior to the merger, * * * was a holding company, whose only asset of consequence was all the stock of * * * was also a holding company whose principal assets included all of the certificates of beneficial interest of * * *, a * * * trust, On December 31, 1959, * * * purchased rom * * * the assets and assumed the liabilities of * * * an * * * corporation engaged in the business of owning and operating cold storage warehouses. Thereafter, the business has been operated as a division of * * *. It is with the proper characterization of the receipts from the operations of this division for purposes of the personal holding company provisions of the Code that we are here concerned.

During the year 1959, * * * had the following gross receipts:

           Cold storage charges                         $ * * *

(1) * * * stated that except for its * * * operating division * * * is admittedly a holding company all of the income of which is from dividends and interest.

(2) Of the items of gross receipts listed above * * * stated that * * * considers space rentals, building and equipment rentals, and miscellaneous, which items represent roughly 1/3 of * * * gross receipts, to be personal holding company income, but that the items listed as cold storage charges, freezing charges, handling charges and labor charges are claimed by the taxpayer to be nonpersonal holding company income.

(3) The cold storage charges, handling charges, freezing charges, etc., are itemized separately on bills presented to customers of * * * public warehouse because the amount of services required varies from customer to customer. That is to say, some customers may bring in goods which require freezing, other will bring them in already frozen. Some customers will require more handling of their goods than others, etc.

(4) Counsel represented that as a rule * * * freezes substantially all of the goods brought in for storage rather than storing goods brought in already frozen. This indicates that * * * customarily renders services in connection with its storage facilities and is not merely leasing space.

(5) The item called handling charges refers to the charges to the customers for the use of * * * labor forces in connection with the cold storage facilities.

(6) The item classified as labor charges refers to charges made to * * * tenants, * * * and * * *, to which * * * leases refrigerated warehouses. The item characterized in taxpayer's request for ruling as space rentals represents income derived from these leases. The leases between * * * and its tenants provide in clause 15(b) that the laborers shall continue as employees of * * * and * * * shall be directly responsible to them for their wages, welfare payments, social security taxes, workmen's compensation and any other employee benefits and that the lessees are merely renting their services. In addition, counsel states that * * * is responsible for withholding of income tax from the pay of these employees and that it is generally understood by the parties concerned that the laborers are employees of * * *. It is noted that the leases provide that when a lessee desires to increase or decrease the number of laborers it is using it shall notify * * * 48 hours in advance of such desired increase or decrease. It is understood from counsel that * * * labor force is used interchangeably to perform labor services for the tenants, and when not so occupied, to perform handling services, etc., at * * * public facility.

(7) Counsel stated that * * * maintains supervision and control over its public facility at all times, that customers are not assigned any specific space in the warehouse and that they have no right to come on the premises and deal with their goods themselves.

(8) Counsel for taxpayer represented that the cost of materials such as cartons, containers, etc. which * * * may supply to customers is negligible and that aside from the storage itself which it provides, related services to customers are substantially all it offers. According to the Statement of Financial Condition submitted as Exhibit A, * * * has no inventory accounts.

You may wish to incorporate some of the above material in the proposed ruling letter. As indicated previously, this office is in general agreement with the proposed ruling addressed to * * *. However, in view of the factual representations regarding the matters which are set forth in (8) above, it is recommended that the following sentences be added to the answer appearing in subparagraph (a) of the third paragraph on page 4 of the ruling letter:

JDMcCABE:HMW - 3/28/61

T:R:C-RN

The pertinent facts and information, as submitted, are as follows:

The term "storage" involves the safekeeping of goods, or more specifically, the safekeeping of goods in a warehouse or other depository. The underlying idea of the word is that of holding or safekeeping goods in a warehouse or other depository to await the happening of some future event or contingency which will call for the removal of the goods. (Corpus Juris Secundum, Volume 83, p. 100; Words and Phrases, Volume 40, p. 216.)

Section 1.542-2 of the Income Tax Regulations refers to section 61 of the Code and sections 1.61-1 through 1.61-14 of the Regulations for the definition of "gross income".

Section 1.61-3(a) of the Regulations provides that in a manufacturing, merchandising, or mining business, "gross income" means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. Gross income is determined without subtraction of depletion allowances based on a percentage of income, and without subtraction of selling expenses, losses, or other items not ordinarily used in computing cost of goods sold. The cost of goods sold should be determined in accordance with the method of accounting consistently used by the taxpayer.

Under section 1.162-1(a) of the Regulations, it is provided, in part, that business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business, except items which are used as the basis for a deduction or a credit under provisions of law other than section 162. The cost of goods purchased for resale, with proper adjustment for opening and closing inventories, is deducted from gross sales in computing gross income. Among the items included in business expenses are management expenses, commissions, labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or business, advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property.

The decisions in the cases of W. A. Bechtel Company, 42 B.T.A. 927, and Andrew Jergens Company, 40 B.T.A. 868, appear to stand for the general proposition that gross income of a corporation other than a manufacturing, merchandising, or mining company consists of the total revenue derived from the operation and management of the business and property of the corporation, together with all amounts of income, including gains and profits from all other sources.

The answers to the questions posed are furnished below in the order in which they were presented:

A copy of this ruling letter is being forwarded to * * * in accordance with the authorization contained in the power of attorney on file in this office.