433 F.2d 728 (5th Cir. 1970), 29227, Sammons v. United States

Docket Nº:29227.
Citation:433 F.2d 728
Party Name:C. A. SAMMONS, Individually and as Independent Executor of the Estate of Rosine S. Sammons, Deceased, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
Case Date:November 04, 1970
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 728

433 F.2d 728 (5th Cir. 1970)

C. A. SAMMONS, Individually and as Independent Executor of the Estate of Rosine S. Sammons, Deceased, Plaintiff-Appellant,

v.

UNITED STATES of America, Defendant-Appellee.

No. 29227.

United States Court of Appeals, Fifth Circuit.

November 4, 1970

Rehearing Denied Dec. 15, 1970.

Page 729

B. Thomas McElroy, White, McElroy & White, Dallas, Tex., for plaintiff-appellant.

Daniel L. Penner, Atty., Tax Div., Department of Justice, Fort Worth, Tex., Martha Joe Stroud, Ast. U.S. Atty., Dallas, Tex., Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, Grant W. Wiprud, John A. Townsend, Attys., Tax Div., U.S. Department of Justice, Washington, D.C., for defendant-appellee; Eldon B. Mahon, U.S. Atty., of counsel.

Before GEWIN, MORGAN and ADAMS, [a1] Circuit Judges.

LEWIS R. MORGAN, Circuit Judge:

In this federal income tax case appellant-taxpayer claims a refund for taxes paid on an alleged constructive dividend which arose when stock was transferred between corporations either owned outright or controlled by the taxpayer. The jury below found that the stock was transferred at a price well below fair market value, and the trial judge entered judgment against the taxpayer. We affirm.

In December of 1957, Sammons, the taxpayer in this contest, became interested in purchasing a multi-wall bag and paper business for sale by Fulton Bag and Cotton Mills Company ('Atlanta Fulton'). As controlling shareholder of several large corporations, Sammons used a rather complicated plan which resulted in his acquisition on January 2, 1958, of the two factories comprising the bag manufacturing operation. This plan may be outlined as follows: American Republic Life Insurance Company, a corporation indirectly controlled by Sammons, purchased the fixed assets while the other assets of the bag business were acquired by Fulton Bag and Products Company ('Texas Fulton') which had as its sole owners five corporations controlled by Sammons. 1 The fixed assets were then leased by American Republic to Texas Fulton which commenced the operation of the multi-wall bag business previously operated by Atlanta Fulton.

On February 11, 1958, the five Sammons' corporations sold their Texas Fulton stock at cost to another Sammons' corporation, Fidelity National Life Insurance Company. At the trial below, Sammons stated that he originally acquired the bag business through the five corporations and then later transferred the business to Fidelity for two principal reasons: First, due to the tight money situation at the time of the initial purchase, Fidelity was unable to come up with enough capital to finance the sale, whereas, the five other corporations in combination easily raised the money. Secondly, the bag business was not retained by the five corporations because Sammons wanted to enlarge Fidelity by allowing it to acquire profitable investments and thus provide a place for executive employees in other parts of the organization who were interested in

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managing a small and yet expanding corporation.

Fidelity held its investment until April 2, 1958, when, after lengthy negotiations, the Texas Fulton stock was sold to West Virginia Pulp and Paper Company (Westvaco) for cost plus $556,000 profit. Westvaco purchased the bag business because it had recently developed a technological breakthrough, the Clupac process, whereby stretchable paper could be produced and then made into elastic paper bags. Westvaco hoped to create a consumer demand for their product and thereby force other paper companies to buy the Clupac process on a licensing basis.

Simply stated, the multi-wall bag business progressed through three separate transactions within a time preiod of approximately four months: The business was purchased from Atlanta Fulton by the five Sammons' corporations; it was then sold at cost to another Sammons' corporation; and thirdly, the business was sold at a profit to Westvaco, a company outside the Sammons corporate empire.

The jury's finding, upheld by the district court, was that Fidelity received a bargain purchase from...

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