James Realty Company v. United States

• Decision Date: 21 July 1960
• Docket Number: No. 16406.,16406.
• Citation: 280 F.2d 394
• Parties: JAMES REALTY COMPANY, a Corporation, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

280 F.2d 394 (1960)

JAMES REALTY COMPANY, a Corporation, Appellant, v. UNITED STATES of America, Appellee.

No. 16406.

United States Court of Appeals Eighth Circuit.

July 21, 1960.

Joseph A. Maun, St. Paul, Minn. (Maurice L. Grossman, Minneapolis, Minn., on the brief), for appellant.

George F. Lynch, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Harry Marselli and Lee A. Jackson, Attys., Dept. of Justice, Washington, D. C., and Fallon Kelly, U. S. Atty., St. Paul, Minn., on the brief), for appellee.

Before GARDNER, WOODROUGH, and BLACKMUN, Circuit Judges.

WOODROUGH, Circuit Judge.

The taxpayer James Realty Company, a corporation, prosecutes this appeal from that part of a judgment which denies it recovery of refund of its payment of deficiency assessed for corporate surtax and excess profits tax for its taxable year ending November 30, 1953. It received and made return of income of $24,699.05 for the period and claimed deduction under the $25,000 corporate surtax exemption and $25,000 minimum excess profits tax credit allowed by Section 15(b)¹ and Section 431,² Internal Revenue Code of 1939.

The Commissioner disallowed the deduction and credit on the ground that the corporation was created solely for the purpose of tax avoidance and was deprived of the right to the exemption and credit by Sections 129(a)³ and 15(c)⁴ of the Internal Revenue Code of 1939. The resulting deficiency was paid and this action followed. After partial trial before a jury, the issues were submitted to the Court by stipulation of the parties. The opinion of the Court is published at 176 F.Supp. 306.

It appeared on the trial that Adolph Fine organized Adolph Fine, Inc. in 1944 to engage in the construction business and later in 1949 he incorporated Fine Realty, Inc., whose principal activity was to sell homes built by Adolph Fine, Inc. Both of these corporations were controlled and managed by Adolph Fine and his wife, Mildred, who owned the stock of such corporations individually or in trust for their children. Also, at all times pertinent hereto, Adolph Fine was president and treasurer, Mildred Fine was vice president and secretary, and June Myslajek was assistant secretary to Adolph Fine, Inc.; Mildred Fine was president and treasurer, M. L. Grossman was vice president, and June Myslajek was secretary of Fine Realty, Inc.

In 1952, Adolph Fine, as an individual, owned certain undeveloped land located in the village of St. Louis Park, Minnesota, which he caused to be subdivided and platted for the purpose of home development, and named it the Jeffrey, James Fine Addition to St. Louis Park.

On November 20, 1952, Adolph Fine caused the taxpayer, James Realty Company, to be organized with an initial authorized capital of $25,000, consisting of ten shares of Class A common stock at a par value of $100 (voting) and two hundred and forty shares of Class B common stock at a par value of $100 (non-voting). According to the articles of incorporation, the purpose of the corporation was, among other things:

"To acquire, improve, and develop real property; to erect dwellings of all kinds and to sell, or rent the same; also to acquire, by purchase, lease, or otherwise, and to take, own, hold, sell, exchange, transfer, lease, repair, maintain, improve, mortgage, or in any other manner deal in and with real property * * *."

On November 24, 1952, Adolph Fine conveyed eighteen of the lots in the Jeffrey, James Fine Addition to the taxpayer corporation in exchange for two shares of its Class A common stock and thirty-four shares of its Class B common stock. The value of the lots in terms of the thirty-six shares was $200 per lot or $3,600. On the same day, Adolph Fine transferred seventeen shares of the Class B stock to his wife Mildred in trust for their sons Jeffrey and James.

Also on November 24, 1952, the taxpayer corporation, acting through its president, Adolph Fine, entered into two written contracts. The first was an agreement with Adolph Fine, Inc., by which that corporation would construct houses on the lots owned by the taxpayer James Realty Co., at cost plus 12½%. By the terms of a second contract, with Fine Realty, Inc., that corporation was made the exclusive selling agent of the homes to be constructed for taxpayer by Adolph Fine, Inc. Sales commissions were to be from 5% to 7½% depending upon financing arrangements and costs.

In August, 1953, taxpayer purchased thirty-six lots located in the neighboring West Tonka Hills Addition from Fine Realty, Inc. at a price of $650 per lot, or a total price of $23,000.

During its fiscal year ended November 30, 1953, when taxpayer reported taxable income in the amount of $24,699.05, only $355.56 of this amount was attributable to the sale of lots purchased from Fine Realty, Inc., while the remaining income was derived from sales of houses built on lots acquired from Adolph Fine.

Taxpayer was one of nine development companies formed by Adolph Fine between 1950 and 1954. All of them occupied offices owned by Adolph Fine, Inc., and were supplied with bookkeeping services by the same personnel who kept the books of Adolph Fine, Inc.

Taxpayer filed a timely income tax return for the fiscal year ended November 30, 1953, and paid the tax shown thereon in the amount of $7,409.72. The District Director of Internal Revenue for the District of Minnesota made a deficiency assessment in the amount of $14,066.11, plus statutory interest, by disallowing the corporate surtax exemption and excess profits credit, and assessing an accumulated earnings tax under § 102, Int.Rev.Code of 1939, 26 U.S.C.A. § 102, in addition.⁵ Taxpayer paid the deficiency assessed, plus interest in the amount of $3,480.80, and thereafter filed the timely claim for refund which the Commissioner denied.

The Court considered the testimony tendered by the taxpayer to show that its existence was justified by bona fide business purposes although as Mr. Fine testified, "he was aware" of the tax results of the multiple corporations he caused to be organized.

The District Court found as ultimate facts: (a) that there was no real business purpose for the creation of the taxpayer corporation and that it derived no income from independent activities of a nature different from those of Adolph Fine, Inc., and Fine Realty, Inc.; (b) that the principal purpose for the acquisition of the taxpayer corporation by Adolph Fine was tax avoidance by securing the benefit of another corporate surtax exemption and excess profits credit which he would not otherwise enjoy; (c) that taxpayer was created for the purpose of acquiring property from other corporations controlled by the same stockholders and was not actively engaged in business in August, 1953, when it acquired the thirty-six lots from Fine Realty, Inc.; (d) that at the time of the formation of the taxpayer-corporation Adolph Fine, Inc., and Fine Realty, Inc., were conducting trades or businesses substantially similar to that of the taxpayer corporation during its taxable year ended November 30, 1953; (e) and that during its taxable year ended November 30, 1953, the taxpayer did not permit earnings or profits to accumulate beyond the reasonable needs of its business.

Accordingly, the court concluded that the Commissioner properly disallowed the surtax exemption and minimum excess profits tax credit under Sections 15 (c) and 129(a) (1) of the Internal Revenue Code of 1939.

The question presented here is whether control of the taxpayer was acquired by Adolph Fine for the principal purpose of avoiding federal income and excess profits taxes by securing the benefit of another surtax exemption and excess profits tax credit which he would not otherwise enjoy so that the disallowance of the exemption and credit was proper under Section 129(a) and under Section 15(c) as held by the District Court.

The determination by the District Court that Mr. Fine organized and acquired control of the taxpayer corporation for the principal purpose of tax avoidance was a finding of fact which is conclusive on this appeal if supported by substantial evidence and not clearly erroneous. Although Mr. Fine testified that in forming the taxpayer and eight other corporations he had in mind the two purposes of implementing his estate plan and of spreading and minimizing risks of loss from business reversal or tort liability and that tax saving was not the principal purpose, he admitted that he was aware of the tax consequences of the multiple corporate set up and testimony of his secretary and bookkeeper was to the effect that "she made adjusting entries" in the books of Adolph Fine, Inc., Fine Realty, Inc., and the development companies including taxpayer; that "a great deal of consideration was given to taxes" by Mr. Fine and his accountants and that "we were very careful to keep the figures under $25,000.00, the profit figures." An office memorandum from Mr. Fine made in 1957 concerning "the land status" of "the following companies" "to determine what company should own and develop" certain lands included the statement: "This will depend upon the possible profit status for the year 1957 in each of the companies." The tax returns of the various corporations formed by Mr. Fine as shown in the Exhibit B which the District Court included in its opinion shows that in 1950 the income from development and sale of homes reported by Adolph Fine, Inc. and Fine Realty, Inc. was $202,268.00 and $34,212.00. For the ensuing years 1951-1956 following the creation of the various development companies the taxable income of the two named companies dropped with but few exceptions to less than $25,000.00 and each of those companies reported less than $25,000.00. Notwithstanding Mr. Fine's testimony that avoidance of tax was not a prime consideration in splitting his home building business, there was substantial evidence to support the finding of the Court that the principal purpose was to avoid...