1940 BTA LEXIS 878 | B.T.A. | 1940
Lead Opinion
Petitioner here attacks respondent’s determination of a surtax upon the taxpayer based upon section 102 (a) of the Eevenue Act of 1934
In the instant proceeding respondent relies upon subsection (b) of section 102, supra, which provides:
(b) Peima Facie Evidence. — 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 avoid surtax.
It is an admitted fact in this proceeding that gains were permitted to accumulate during the taxable year; but that they were beyond the reasonable needs of the business is contested by the taxpayer. In support of his contention on this point respondent has cited several cases, among them Helvering v. National Grocery Co., 304 U. S. 282. In
In the instant ease a balance sheet would provide no basis for adjudging the necessity of a surplus. But the Court, in the National Grocery case, went on to say that no conceivable expansion could have utilized so large a surplus. It is possible, however, in the instant case, that the establishment of a New York daily and an annual could have completely exhausted the surplus, but these ideas were never carried into effect and were, apparently, abandoned.
In United States v. Tway Coal Sales Co., 75 Fed. (2d) 336, cited by the respondent, the court declared that “It is the accumulation of surplus plus its interdicted purpose that brings the statute into operation, and its size in relation to business needs is but a circumstance out of which a presumption of improper purpose arises, though such purpose may be shown by pertinent evidence with or without the presumption as an aid.” This view has been accepted as correct by the Board and its application to the instant facts tests the validity of the respondent’s contentions. The petitioner corporation certainly can not be judged by the same business standards as could a grocery store chain. What would clearly be an unreasonable surplus in the former case might be far from unreasonable in the latter. In William C. de Mille Productions, Inc., 30 B. T. A. 826, the Board, when confronted with this question, said: “The word ‘reasonable’ is a relative term. What would be reasonable in one situation or for one business might be clearly unreasonable in another.”
Viewing the reasonableness of petitioner’s surplus in this light, and accepting as true the contention of Wilkerson, the sole witness introduced at the hearing, that petitioner’s business was at best a gamble and one in which any year might bring unforeseen lack of patronage, we would then have to arrive at the conclusion that the surplus set up by the petitioner during the taxable year was not necessarily unreasonable. The purpose of accumulating the surplus was set forth by Wilkerson at the hearing and respondent introduced no witnesses to testify to the contrary.
Wilkerson testified that it was in order to avoid the effect of lockouts and to establish independent good will that he purchased the Bel Air property, where he might conduct business at the dinner table. His entry into the restaurant business, he testified, was also to enable petitioner to do business on a social basis. But, interestingly enough, the profits from the restaurants did not go to the petitioner, but to Wilkerson. It was his venture, not the petitioner’s. Wilkerson testified also that he thought it would lend necessary prestige if peti
Whether it be thought a prudent business venture to contemplate expansion or the doing of business on a large scale “front” is not for the Board to determine. It must be assumed that a business shall have the right to grow, William C. de Mille Productions, Inc., supra; and such growth is at the discretion of the corporation. However, in our instant case there appears no rational answer to the sudden abandonment of all the allegedly contemplated expansions. Only one, the failure to build an office building, is satisfactorily explained. If petitioner actually intended the expansions set forth by Wilkerson, it is peculiar that it allowed its surplus on hand to be so diverted to the use of its sole stockholder that it could not make those expansions. Nor has it carried any of them into effect to date, except for the change in office address.
Respondent insists that further facts exist which controvert Wilkerson’s statements as to the corporation’s purposes and intentions. He points to the extensive borrowing of Wilkerson in the taxable year from the funds of the taxpayer. In the National Grocery Co. case, supra, the Court affirmed a principle laid down in United Business Corporation of America, 19 B. T. A. 809; affd., 62 Fed. (2d) 754, to the effect that certain loans were incompatible with a purpose to strengthen the financial position of the petitioner and were entirely in accord with a desire to get the equivalent of the dividends under another guise. In the United Business Corporation case, supra, money was loaned to an individual who held all the capital stock except for three qualifying shares. The Board there found as a matter of fact that the borrower was worth approximately three-quarters of a million dollars in addition to his interest in the corporation in the taxable year, and had the financial ability to meet his obligations to the corporaton. He had the use of the corporation’s funds in an amount greatly in excess of its surplus and made only
The amounts of the loans to Wilkerson are interestingly in proportion to his interest in the accumulated surplus in the years 1985 and 1936. In these years he had title to 80 percent of the outstanding stock (including the 15 shares held by the bank), and consequently, an interest in that proportion in any surplus which might be distributed in the form of dividends. The following shows the
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The close similarity between what Wilkerson borrowed and what he would have received as his share of the dividends (subject, of course, to his wife’s claim under their settlement agreement), while not determinative of the fact that it was Wilkerson’s desire to get the equivalent of his dividends under another guise, certainly casts affirmative weight in that direction.
As respondent points out, Wilkerson actually held no bankable assets sufficient to entice a prudent disinterested corporation to make such large personal loans. If the petitioner was storing up a nest egg for future use in case of emergency, it stands to reason that it would require some form of security which could be readily liquidated. So far as the record indicates, the only security Wilkerson could offer was his interest in the two restaurants and in the private dwelling for the purchase of which he was borrowing. Wilkerson himself pointed out that the restaurants were indirectly beneficial to the business, and, consequently, it stands to reason that the corporation would be loath to see them sold. It is of no consequence that Wilkerson was willing to pay a higher rate of interest than the banks or other interested parties. In the United Business Corporation case, supra, the borrower guaranteed to pay interest. As a matter of fact, he did not currently meet those interest payments. In the instant case the most convenient method of meeting interest payments on the loan would have been for Wilkerson to award himself a greater salary in the years subsequent to 1935. And this he did; whether for this purpose or because he calculated that he actually merited such increase. The evidence shows that by March 1938 Wilkerson had fully repaid the petitioner. The evidence, moreover, clearly shows that petitioner had declared dividends between July 31, 1936, and March 1938, sufficient to aid Wilkerson materially in offsetting the amounts he still owed on those dates. Added to this factor are the salary increases Wilkerson awarded himself, by means of which he paid off the balance. The entire picture, viwed in this light, indicates that the petitioner, at Wilkerson’s direction, must have forthwith abandoned any alleged beneficial purpose for the accumulation of surplus. To conclude otherwise would necessitate overlooking a material inconsistency in petitioner’s management.
Following the principle announced in United Business Corporation, National Grocery Co., and Tway Coal Sales Co., supra, we find
Reviewed by the Board.
Decision will be entered wider Bule SO.
SEC. 102. SuRTAX ON CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS.
(a) Imposition op Tax. — There shall be levied, collected, and paid for each taxable year upon the adjusted net income of every corporation (other than a personal holding company as defined in section 351) if such corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders or the shareholders of any other corporation, through the medium of permitting gains and profits to accumulate instead of being divided or distributed, a surtax equal to the sum of the following:
(1) 25 per centum of the amount of the adjusted net income not in excess of $100,000, plus
(2) 35 per centum of the amount of the adjusted net income in excess of $100,000.