Sammons v. United States

• Decision Date: 15 December 1970
• Docket Number: No. 29227.,29227.
• Citation: 433 F.2d 728
• Parties: 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.
• Court: U.S. Court of Appeals — Fifth Circuit

433 F.2d 728 (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 December 15, 1970.

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, Asst. 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^*, 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 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 period 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 its five brother corporations in that the fair market value of Texas Fulton stock was greater than the amount given by Fidelity. Specifically, the jury concluded that when Sammons caused the stock to be transferred out of the five corporations and into Fidelity, it was worth $500,000 more than Fidelity paid, leaving the taxpayer, Sammons, liable for taxes on this sum as a constructive dividend.

Under Sections 316(a) and 301(c) (1)² of the Internal Revenue Code of 1954, dividends to the shareholder must be included in gross income. The dividend may take the form of cash or it may be constructive so that when a shareholder receives property from the corporation at less than fair market value the difference between this sum and the price paid for the property is included in gross income because "such a sale if for substantially less than the value of the property sold, may be as effective a means of distributing profits among stockholders as the formal declaration of a dividend." Palmer v. Commissioner of Internal Revenue, 1937, 302 U.S. 63, 69, 58 S.Ct. 67, 70, 82 L.Ed. 50.

Neither does the dividend escape taxation simply because it fails to pass through the hands of the particular taxpayer when, as in the instant case, the dividend is diverted at the behest of the shareholder into the hands of others. Biltmore Homes, Inc. v. Commissioner of Internal Revenue, 4 Cir., 1961, 288 F.2d 336, cert. den. 368 U.S. 825, 82 S.Ct. 46, 7 L.Ed.2d 30 (1961); Worcester v. Commissioner of Internal Revenue, 1 Cir., 1966, 370 F.2d 713.

In this appeal the main contention advanced by the taxpayer is that the government did not present sufficient evidence from which a jury could make a valid determination as to the fair market value of the Texas Fulton stock. Attention is drawn to the fact that only negotiations were taking place between Sammons and Westvaco at the time the stock was transferred to Fidelity which, taxpayer asserts, renders valueless the testimony by Westvaco's officer that Sammons had made an offer to sell for cost plus $500,000. The evidence that Westvaco actually did buy Texas Fulton for cost plus $556,000 is insufficient according to appellant because this deal was not consummated until 49 days after Fidelity acquired the stock at cost, and also because Westvaco was a compulsive buyer rather than a willing buyer due to its desire to find an outlet for the Clupac process.

While the taxpayer has pointed out some apparent reasons for discounting the evidence of fair market value offered by the government, this court must exercise great care lest we go beyond our authority and intrude upon that part of the judicial process which the Constitution³ has reserved for the jury. This circuit is replete with cases which protect the jury verdict from undue judicial scrutiny⁴ and only recently we reaffirmed the long standing test that must be followed when the appeal challenges the sufficiency of the evidence:

"We have said that if there is no evidentiary basis for the jury\'s verdict, it cannot be permitted to stand, and that the standard for reviewing a jury verdict is whether the state of the proof is such that reasonable and impartial minds could reach the conclusion the jury expressed in its verdict. The jury is, of course, the traditional finder of the facts, and its verdict must stand unless appellant can show that there is no substantial evidence to support it considering the evidence in the light most favorable to appellees, and clothing it with all reasonable inferences to be deducted therefrom. It is not the function of the appellate court, however, to weigh conflicting evidence, judge the credibility of witnesses and arrive

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