Moline Properties v. Commissioner of Internal Revenue 16 8212 19, 1943

• Decision Date: 01 June 1943
• Docket Number: No. 660,660
• Citation: 319 U.S. 436,87 L.Ed. 1499,63 S.Ct. 1132
• Parties: MOLINE PROPERTIES, Inc., v. COMMISSIONER OF INTERNAL REVENUE. Argued April 16—19, 1943
• Court: U.S. Supreme Court

319 U.S. 436

63 S.Ct. 1132

87 L.Ed. 1499

MOLINE PROPERTIES, Inc.,

v COMMISSIONER OF INTERNAL REVENUE.

No. 660.

Argued April 16—19, 1943.

Decided June 1, 1943.

Mr. Nelson Trottman, of Chicago, Ill., for petitioner.

Mr. J. Louis Monarch, of Washington, D.C., for respondent.

Mr. Justice REED delivered the opinion of the Court.

Petitioner seeks to have the gain on sales of its real property treated as the gain of its sole stockholder and its corporate existence ignored as merely fictitious. Certiorari was granted because of the volume of similar litigation in the lower courts and because of alleged con- flict of the decision below with other circuit court decisions.¹ 318 U.S. 751, 63 S.Ct. 768, 87 L.Ed. —-.

Petitioner was organized by Uly O. Thompson in 1928 to be used as a security device in connection with certain Florida realty owned by him. The mortgagee of the property suggested the arrangement, under which Mr. Thompson conveyed the property to petitioner, which assumed the outstanding mortgages on the property, receiving in return all but the qualifying shares of stock, which he in turn transferred to a voting trustee appointed by the creditor. The stock was to be held as security for an additional loan to Mr. Thompson to be used to pay back taxes on the property. Thompson owned other real property, title to which he held individually. In 1933 the loan which occasioned the creation of petitioner was repaid and the mortgages were refinanced with a different mortgagee; control of petitioner reverted to Mr. Thompson. The new mortgage debt was paid in 1936 by means of a sale of a portion of the property held by petitioner. The remaining holdings of the petitioner were sold in three parcels, one each in 1934, 1935 and 1936, the proceeds being received by Mr. Thompson and deposited in his bank account.

Until 1933 the business done by the corporation consisted of the assumption of a certain obligation of Thompson to the original creditor, the defense of certain condemnation proceedings and the institution of a suit to remove restrictions imposed on the property by a prior deed. The expenses of this suit were paid by Thompson. In 1934 a portion of the property was leased for use as a parking lot for a rental of $1,000. Petitioner has transacted no business since the sale of its last holdings in 1936 but has not been dissolved. It kept no books and maintained no bank account during its existence and owned no other assets than as described. The sales made in 1934 and 1935 were reported in petitioner's income tax returns, a small loss being reported for the earlier year and a gain of over $5,000 being reported for 1935. Subsequently, on advice of his auditor, Thompson filed a claim for refund on petitioner's behalf for 1935 and sought to report the 1935 gain as his individual return. He reported the gain on the 1936 sale.

The question is whether the gain realized on the 1935 and 1936 sales shall be treated as income taxable to petitioner, as the Government urges, or as Thompson's income. The Board of Tax Appeals held for petitioner on the ground that because of its limited purpose, the corporation 'was a mere figmentary agent which should be disregarded in the assessment of taxes.' Moline Properties, Inc. v. Commissioner, 45 B.T.A. 647. The Circuit Court of Appeals reversed on the ground that the corporate entity, chosen by Thompson for reasons sufficient to him, must now be recognized in the taxation of the income of the corporation. Commissioner v. Moline Properties, Inc., 5 Cir., 131 F.2d 388.

The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation² or to avoid³ or to comply with⁴ the demands of creditors or to serve the creator's personal or undisclosed convenience,⁵ so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity. New Colonial Co. v. Helvering, 292 U.S. 435, 442, 54 S.Ct. 788, 791, 78 L.Ed. 1348; Deputy v. Du Pont, 308 U.S. 488, 494, 60 S.Ct. 363, 366, 84 L.Ed. 416. In Burnet v. Commonwealth Imp. Co., 287 U.S. 415, 53 S.Ct. 198, 77 L.Ed. 399, this Court appraised the relation between a corporation and its sole stockholder and held taxable to the corporation a profit on a sale to its stockholder. This was because the taxpayer had adopted the corporate form for purposes of his own. The choice of the advantages of incorporation to do business, it was held, required the acceptance of the tax disadvantages.

To this rule there are recognized exceptions. Southern Pacific Co. v. Lowe, 247 U.S. 330, 38 S.Ct. 540, 62 L.Ed. 1142, and Gulf Oil Corp. v. Lewellyn, 248 U.S. 71, 39 S.Ct. 35, 63 L.Ed. 133, have been recognized as such exceptions but held to lay down no rule for tax purposes. New Colonial Co. v. Helvering, supra, 292 U.S. 442, 54 S.Ct. 791, 78 L.Ed. 1348, note 5; Burnet v. Commonwealth Imp. Co., supra, 287 U.S. 419, 420, 53 S.Ct. 199, 77 L.Ed. 399. A particular legislative purpose, such as the development of the merchant marine whatever the corporate device for ownership, may call for the disregarding of the separate entity, Munson S.S. Line v. Commissioner, 2 Cir., 77 F.2d 849, as may the necessity of striking down frauds on the tax statute, Continental Oil Co. v. Jones, 10 Cir., 113 F.2d 557. In general, in matters relating to the revenue, the corporate form may be disregarded where it is a sham or unreal. In such situations the form is a bald and mischievous fiction. Higgins v. Smith, 308 U.S. 473, 477, 478, 60 S.Ct. 355, 357, 358, 84 L.Ed. 406; Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355.

The petitioner corporation was created by Thompson for his advantage and had a special function from its in- ception. At that time it was...