1935 BTA LEXIS 979 | B.T.A. | 1935
Lead Opinion
The respondent, in auditing petitioner’s returns for 1926 and 1927, computed the tax under both section 230 of the Eevenue Act of 1926 (at the 13% percent rate) and section 220 (at the 50 percent rate). Petitioner does not question the computation under section 230. It takes issue with the respondent’s application to it of section 220, contending that it does not come within the provisions of that section, and that that section is unconstitutional. Subsections (a) and (b) of section 220, which are all we are concerned with here, are set out in the margin.
The constitutionality of section 220 of the Eevenue Act of 1926, and the corresponding provisions of earlier statutes, has been sustained by all the tribunals that have considered the question. See United States Business Corporation v. Commissioner, 62 Fed. (2d) 754, affirming 19 B. T. A. 809; Williams Investment Co. v. United States, 77 Ct. Cls. 396; William C. DeMille Productions, Inc., 30 B. T. A. 826. We follow those decisions on this point.
If the petitioner was either “ formed or availed of ” for the purpose of preventing imposition of surtaxes on its stockholders, it becomes subject to the additional tax. We are convinced that the petitioner corporation was not formed for the purpose described in the statute. The creation of the petitioner was entirely Kelley’s idea, and he carried it through not only without help from the Fishers, but even over the opposition of Harry O. Fisher. Kelley testified at length as to his reasons for organizing the petitioner, and we have set them forth in considerable detail in our findings of fact. A restatement of them is unnecessary here and we need say no more than that on this point, on which Kelley was undoubtedly qualified to testify, we give full credence to his testimony and hold that in so far as the formation of the petitioner is concerned it does not come within section 220.
Throughout the record there is apparent a difference of opinion between Kelley, the actual, active manager of the petitioner, and Harry C. Fisher, its nominal head and majority stockholder. Kelley, on the one hand, bent every effort toward accumulating a sufficient surplus to meet the several contingencies facing the business and to keep up its earning power. Fisher, on the other hand, did not even want a corporation to take over the business, and after he “ adopted the corporation ” — using Kelley’s words — he apparently saw no need of accumulating any capital, for he proceeded in 1927 to overdraw his account by more than $73,000. In fact his withdrawals appear to have been greater than indicated by this figure, for some of his personal withdrawals were charged against the firm of Fisher & Fisher. In 1926 one item of over $39,000, representing a withdrawal by Harry C. Fisher, was charged to the firm, so that as a matter of fact he was overdrawn at the end of that year instead of having a balance to his credit as shown by the books. Kelley tried to interest the Fishers in producing Mutt and Jeff moving pictures in order to keep up the earning power of the cartoons, but they refused to go in with him on the deal.
If we were to judge the purpose of using the corporation for carrying on the cartoon business by the conduct of Harry O. Fisher,
Considerable stress is placed by respondent on the fact that in 1928 petitioner invested in Cartoonist Court, Inc., a corporation organized to take over Harry C. Fisher’s real estate and his racing and breeding-stables, and that in subsequent years petitioner made substantial advances to that corporation. We have considered these facts, but we do not believe that they reflect the purpose for which petitioner was operated in 1926 and 1927.
We accordingly conclude that petitioner was not formed nor, during 1926 and 1927, availed of for the purpose of permitting its stockholders to escape surtax.
Reviewed by the Board.
Decision will be entered imder Rule 50.
See. 220. (a) If any corporation however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section 230 of this title and shall (except as provided in subdivision (d) of this section) be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax.
(b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima faeie evidence of a purpose to escape the surtax.
Dissenting Opinion
dissenting: The “ gains or profits ” of the petitioner in question here were “ permitted to accumulate beyond the reasonable needs of the business; and hence we have prima facie evidence of a purpose to escape the surtax.” Sec. 220 (b), supra. No evidence has been presented which is adequate to overcome the prima facie evidence or the defense thereby established for the respondent. Obviously, a prima facie showing of this character cannot be overcome by the very same evidence which, under the very same subsection of the statute, establishes it. Furthermore, in addition to this prima facie evidence, there likewise appears from the majority report other evidence which supports the position of the respondent in this respect. To illustrate: Harry 0. Fisher, who at all times in question here owned at least 98 percent of the petitioner’s stock, at the outset did not consider the formation of petitioner necessary, and after its incorporation he did not consider the accumulation of the surplus in question necessary; the corporation conducted its business successfully during the years in question without the stockholders ever paying in any cash to the corporation for its stock; at the end of 1927 Harry C. Fisher owed the petitioner $73,627.27 and his account was, in reality, also heavily overdrawn in 1926; none of the surplus was ever actually used for any of the alleged purposes for which it was accumulated; and it was actually used, promptly after 1927, for wholly different purposes and primarily, if not exclusively, to the personal advantage of Harry C. Fisher.
All of the foregoing applies to the accumulations of surplus by petitioner (1) in the unsuccessful attempt to curb the extravagant expenditures of Harry C. Fisher, (2) in the unsuccessful attempt to make a capital investment in a minority interest in the New York World, and (3) in the attempt at preparation to meet imaginary contingencies, which might have arisen if the Bell Syndicate, Inc., had breached its contract or if Wheeler, its president, had severed his connection with it. There is no showing of a breach of contract on the part of the Bell Syndicate, Inc., or that such breach was ever imminent. The only showing made in this respect is to the contrary. The same is true of Wheeler’s severance of his connection with the Bell Syndicate, Inc. There is no adequate showing that the accumulation of surplus in question would have been nec
In connection with what is said herein, see the dissent in Cecil B. DeMille, 31 B. T. A. 1161. See also William C. DeMille Productions, Inc., 30 B. T. A. 826.
It is well settled that a corporation is an entity, distinct, separate, and apart from its stockholders and each of them, even where it is almost wholly owned and completely controlled by a single stockholder, as petitioner was by Harry C. Fisher. Edward Securities Corporation, 30 B. T. A. 918, and cases cited therein. Hence the personal affairs and business of Harry C. Fisher were not those of the corporation. To the extent that the corporation participated in his personal affairs and business it stepped out of its own business. Its business, as actually carried on, at all the times material here, was that of furnishing to the Bell Syndicate, Inc., exclusively, drawings for the Mutt and Jeff cartoons for sale and distribution, by the latter, to newspapers. While Harry C. Fisher was the originator of these cartoons, he did not even make any of the drawings for them in the years before us. To the extent that the petitioner corporation participated in an unsuccessful attempt to curb Harry 0. Fisher’s extravagant personal expenditures by accumulating its surplus, and this is the underlying, controlling reason why “ the gains or profits ” were “ permitted to accumulate ”, it was concerned with his personal affairs and business and was not confined to its own business; and hence what it did in this respect was “ beyond the reasonable needs of the business ” and “ is prima facie evidence of a purpose to escape the surtax ”, under applicable provisions of the statute. It is unnecessary to pass upon the question as to whether what petitioner did in these respects was ultra vires. That it was “ beyond the reasonable needs of the business ” is sufficient to establish a prima facie case for the respondent, without other grounds; but, as heretofore indicated, there are other grounds.
I also find it unnecessary to pass on the question as to whether the petitioner was “ formed ” for the purpose denounced by the statute. To sustain respondent’s position in these respects it is sufficient that it was “ availed of ” for that purpose; and the inescapable conclusion is that it was thus “ availed of.” Sec. 220 (a), supra.
Since this prima facie case for respondent has not been overcome, as heretofore stated, I can not agree with the majority in so far as they hold that any of the “ additional ” taxes in question herein,' as specified in section 220 (b), supra, are not to be imposed.
Dissenting Opinion
dissenting: I am unable to agree with the prevailing opinion. In my judgment the petitioner has not furnished evidence sufficient to demonstrate that the surplus was not more than was reasonably necessary for the needs of the business. The burden of proof rested on petitioner. I do not believe he has discharged it.