1936 BTA LEXIS 652 | B.T.A. | 1936
Lead Opinion
The question to be considered herein is whether the petitioner was formed in 1927 or availed of in 1930 for the purpose of preventing the imposition of the surtax upon its shareholders
Here the petitioner was organized in 1927 for the purpose of acquiring the Butler-Cobb contract, and, except for the acquisition of such contract and the performance of the obligations arising thereunder, the petitioner transacted no other business. Butler testified, in substance, that the purchase of the stock was a very large purchase, payments for which extended over a period of five years during which something might happen to any one of the four interested therein; that it was necessary for his protection as guarantor of the contract to keep the stock together; that the petitioner was organized so that he could keep the stock together by his control of the petitioner; that, further, it would have been very disrupting in the event one of the parties to whom he has made a partial assignment died or the interest of any one of them became subjected to an attachment by creditors. Jamison testified, in substance, that the reason for incorporating the petitioner was to hold the block of stock purchased intact, to control the vote and to protect Butler if anything happened to the minor participants in the contract, as he understood that the whole contract, being a joint contract, under the laws of the State of Washington would be subject to probate upon the death of any one of the assignees. The testimony of Crosby was to similar effect. Butler testified further that, although in 1927 the prospect of a dividend from the Timber Co. was excellent, there was then no immediate prospect of a dividend; that the payment of a dividend by the Timber Co. was dependent upon future trade conditions and operations; and that the question of paying for the stock in the next five years absorbed them.
In our opinion, and we have so found, the petitioner was not formed in 1927 for the purpose of preventing the imposition of the surtax upon its stockholders in 1930 through the medium of permitting its gains and profits to accumulate instead of being divided or distributed.
Was the corporation availed of in 1930 for such purpose? It is apparent that, although the petitioner had a book surplus of $144,-115.11 at the end of 1930, the petitioner had no funds or property which it could distribute to its shareholders; it had no cash on hand and the participation certificates representing the first and second mortgage bonds issued by the Timber Co. as a dividend were held by the National Bank in escrow under the terms of the Butler-Cobb contract. Its only remaining asset was the Butler-Cobb contract, which had not been completed and upon which there was still owing an unpaid balance of $49,373.41. The instant proceeding is distinguishable from cases wherein it was held that the corporations therein involved were formed or availed of for the purpose of preventing the imposition of surtaxes upon its shareholders, it appearing therein that the shareholders withdrew or borrowed substantial available sums from such corporations for their own purposes.
Under all the facts and circumstances we are of the opinion, and have so found, that the petitioner was not availed of in 1930 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; and its gains and profits were not permitted to accumulate in 1930 beyond the reasonable needs of its business.
The respondent points on brief to his Exhibit F as strong evidence that the petitioner was availed of for the purpose of evading surtaxes, and in particular to the statement therein as follows:
* * ⅜ It is understood that when such assignment shall have been made such dividends as may be declared upon the International Timber Company shares will, in effect be payable to the Delaware Corporation, although the said shares of the International Timber Company still stand in the name of the seller, assigned by him in blank and deposited in escrow in a bank with, the contract of purchase, and said dividends being in effect payable from one-corporation to another corporation, will not he subject to the Federal Income Tax until they are paid out by the Delaware Corporation [petitioner] by way of dividends.
The accountant testified, among other things, that he was secretary of the petitioner merely for the purpose of keeping its books since-its incorporation; that he had two other men who assisted him in-keeping the records and in preparing the tax returns for 27 corporations ; that .he usually prepared a memorandum similar to Exhibit F so that if anything happened to him the men would know what he had done; that he knew, as appears in the memorandum,, that the petitioner was to be formed; that the information contained in the first part of the above quoted statement was obtained from the Butler-Cobb contract itself and not from his discussion with Butler; that he did not talk about the transaction with any stockholder other than Butler; that, when he added the portion of such statement to the effect that dividends payable by one corporation to another corporation will not be subject to Federal income tax until paid out.
The petitioner also adduced evidence as to the value of the bonds of the Timber Co. issued as dividends and in particular pertaining to the value of the second mortgage bonds in support of its claim that the book surplus was overstated in that the value of the bonds was considerably below par. It is also contended by petitioner that the bonds were payable out of a sinking fund to be created by contributions on the basis of $3.75 per thousand feet of lumber logged and hence were not a taxable distribution. In view of our holding that the petitioner was not formed in 1927 or availed of in 1930 for the purpose of preventing the imposition of surtaxes upon its shareholders through the medium of permitting its gains and profits to
Reviewed by the Board.
Decision will be entered for the yetitioner.
SEC. 104. ACCUMULATION OF SURPLUS TO EVADE SURTAXES.
(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 13 and shall 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 facie evidence of a purpose to escape the surtax.
United Business Corporation of America, 19 B. T. A. 809; affirmed in United Business Corporation of America v. Commissioner, 62 Fed. (2d) 754; certiorari denied, 290 U. S. 635 ; William C. de Mille Productions, Inc., 30 B. T. A. 826; A. D. Saenyer, Inc., 33 B. T. A. 135; Edward G. Swartz, Inc., 33 B. T. A. 355. See Gardiner v. Welch,-Fed. Supp. - (Dist. Ct., S. Dist. Cal., Feb. 13, 1936).