Penn v. Commissioner of Internal Revenue, 13689
| Decision Date | 15 January 1955 |
| Docket Number | 13702.,No. 13689,13689 |
| Citation | 219 F.2d 18 |
| Parties | Ralph PENN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Albert PENN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Will Freeman, Norman Lettvin, Chicago, Ill., for petitioner.
H. Brian Holland, Asst. Atty. Gen., Harry Marselli, Ellis N. Slack, George F. Lynch, Sp. Assts. to Atty. Gen., Charles W. Davis, Chief Counsel, Internal Revenue Service, Washington, D. C., for respondent.
Before FEE and CHAMBERS, Circuit Judges, and WALSH, District Judge.
These consolidated proceedings in volve deficiencies in gift taxes determined for 1946 against petitioner Albert Penn and for 1946 and 1947 against petitioner Ralph Penn. During these years, the taxpayers each made gifts of shares of Penn Electric Switch Company common stock and reported the values thereof per share on their respective gift tax returns for those years. The Commissioner determined that the fair market value of the above mentioned common stock was $20.00 per share on each of the respective dates of the gifts thereof, and issued notices of deficiency based on that determination. Trial was held before the Tax Court at which a stipulation of facts was introduced, which is here epitomized.
The Penn Electric Switch Company, hereinafter referred to as "Switch Company," was an Iowa corporation with principal offices at Goshen, Indiana, incorporated in July, 1928, to take over the assets and business of a co-partnership of the same name. During the taxable years and for many years prior thereto, Albert Penn was president and chairman of the board of directors and Ralph Penn was vice-president and treasurer and a director of that company. At all times, Switch Company has kept its books and records and filed its tax returns on a calendar year accrual basis of accounting. During the years material here, Switch Company engaged in the business of manufacturing and selling automatic electric controls for various types of heating equipment, commercial refrigeration, air-conditioning equipment, pumps, air compressors and engines.
During 1946-7 the capital stock of Switch Company was divided into Class A and Common. Class A was originally sold to the public at $20.75 per share in 1936 through a Chicago brokerage firm, and during the taxable years and before was listed on the exchange. In 1940-6 Switch Company paid dividends on Class A stock and in certain of those years on common. The common was never listed on any exchange and was held by about thirty stockholders at the times here involved. The bulk of common was held in about equal proportions by Albert Penn and his immediate family and Ralph Penn and his immediate family. Approximately 16,000 shares, constituting the balance of common, were held largely by directors, officers and employees of the company. There were no sales of common in 1945-6, but in three different months after January, 1947, a total of 815 shares was sold at a price of $10.00 per share to persons then or theretofore connected with the company as legal counsel, officer or employee.
For the indicated calendar years the book value of Switch Company's outstanding common stock at the beginning of each year, after giving effect to the redemption value of 50,000 shares of Class A stock of $25.00 per share, was as follows:
Year Book Value of Common
1941 $236,472.00
1942 444,798.00
1943 692,655.00
1944 350,807.00
1945 409,537.00
1946 405,540.00
During the years 1941 to 1946, inclusive, Switch Company followed a policy of paying unusually high salaries to its executives. The percentage of such salaries to the company net profits, after taxes, for each of those years, was as follows: 43 per cent for 1941, 86 per cent for 1942, 81 per cent for 1943, 92 per cent for 1944, 103 per cent for 1945, and 29 per cent for 1946.
For the indicated calendar years, Switch Company's net profit per share on common after Class A dividends was as follows:
Profit per Share on
Year Common
1941 $1.92
1942 1.22
1943 1.59
1944 1.34
1945 1.12
1946 4.45
While, for our purposes, the profit per share itself for the year is the interesting factor, the tabulation in evidence includes figures for each of these years on net sales, gross profit on sales and net profit after federal income taxes, which have been here omitted although incidently reflected by the figures given.
For the period of twenty weeks ending May 18, 1947, Switch Company had net sales amounting to $3,597,107.00; gross profit on sales amounting to $997,255.00; and net profit of $336,231.00 after provision for federal income taxes.
On its outstanding 100,000 shares of $5.00 par value common stock, Switch Company...
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