Faber Cement Block Co. v. Comm'r of Internal Revenue, Docket No. 4636-66.
| Decision Date | 20 May 1968 |
| Docket Number | Docket No. 4636-66. |
| Citation | 50 T.C. 317 |
| Parties | FABER CEMENT BLOCK CO., INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Samuel J. Foosaner, for the petitioner.
Gerald Backer, for the respondent.
Petitioner's liquid assets were fully committed to the reasonable needs of its business, as reflected in sufficiently definite plans for expansion and working capital requirements, to justify the retention of its entire accumulation of earnings and profits during 1961, 1962, and 1963. Consequently, petitioner was not liable for the surtax imposed by sec. 531, I.R.C. 1954.
Respondent determined deficiencies in accumulated earnings taxes for the taxable years 1961, 1962, and 1963 in the respective amounts of $50,928.91, $34,317.22, and $55,824.07. The sole question for our consideration is whether petitioner was availed of for the purpose of avoiding Federal income taxes with respect to its shareholders.
Some of the facts have been stipulated. Those facts and the exhibits attached thereto are hereby incorporated by this reference.
Petitioner, Faber Cement Block Co., Inc. (hereinafter referred to as Faber Block), is a New Jersey corporation engaged in the business of manufacturing and selling cement and cinder blocks. It had its principal place of business at the time the petition herein was filed at Paramus, N.J. Petitioner's books and tax returns are kept and filed on the calendar year, accrual basis. Timely Federal corporate income tax returns were filed for 1961, 1962, and 1963 with the district director of internal revenue, Newark, N.J.
Beginning sometime around 1920, Albert J. Faber and Gerhardt P. Faber operated the business as a partnership with their father. In 1928, the partnership was incorporated. Since 1938, Faber Block has been located on Route 17, Paramus, N.J., approximately a mile and a half from its location prior to that time.
At all times material herein, Gerhardt P. Faber was petitioner's president, his wife, Elsie, vice president, and Albert J. Faber, secretary-treasurer, the latter being the chief administrative officer of the company. These three parties also made up petitioner's board of directors. Board meetings were sometimes attended by Emil M. Wulster and Samuel J. Foosaner, respectively, general and special tax counsel to petitioner before and during the years in issue. Foosaner prepared certain corporate minutes for board meetings held during such years.
Prior to 1958, the outstanding stock of Faber Block was held as follows:
+---------------------------------------+
¦ ¦Number of ¦ ¦
+-----------------+-----------+---------¦
¦Stockholder ¦shares ¦Percent ¦
+-----------------+-----------+---------¦
¦ ¦ ¦ ¦
+-----------------+-----------+---------¦
¦Albert J. Faber ¦52.5 ¦50 ¦
+-----------------+-----------+---------¦
¦Gerhardt P. Faber¦35 ¦33 1/3 ¦
+-----------------+-----------+---------¦
¦Elsie Faber ¦17.5 ¦16 2/3 ¦
+---------------------------------------+
In 1958, a recapitalization of Faber Block was effected, resulting in three classes of authorized stock, as follows: 1,000 shares $100 par 6 percent cumulative preferred stock; 5,000 shares no-par class A common stock (voting); 4,000 shares no-par class B common stock (non-voting). Under the new plan, voting privileges were vested exclusively in the class A stockholders. Preferred shareholders were to have preference upon liquidation to the extent of the par value of the stock plus any unpaid dividends. Thereafter, class A and class B shareholders would share ratably in the distribution. After payment of a 6-percent dividend on a cumulative basis to preferred shareholders, class A and class B holders were to be entitled on an equal basis to such dividends as the board of directors might declare. Pursuant to such plan, each share of old stock was exchanged for 10 shares of class A and 20 shares of class B. No preferred stock was ever issued. Immediately following the recapitalization, the issued and outstanding stock of petitioner stood as follows:
+--------------------------------------------------------+
¦ ¦Class A ¦Class B ¦
+-----------------+-----------------+--------------------¦
¦ ¦common (voting) ¦common (nonvoting) ¦
+-----------------+-----------------+--------------------¦
¦Stockholder ¦shares ¦shares ¦
+-----------------+-----------------+--------------------¦
¦ ¦ ¦ ¦
+-----------------+-----------------+--------------------¦
¦Albert J. Faber ¦525 ¦1,500 ¦
+-----------------+-----------------+--------------------¦
¦Gerhardt P. Faber¦350 ¦700 ¦
+-----------------+-----------------+--------------------¦
¦Elsie Faber ¦175 ¦350 ¦
+-----------------+-----------------+--------------------¦
¦ ¦1,050 ¦2,100 ¦
+--------------------------------------------------------+
At the stated dates during the years in issue, the outstanding class B stock was held by the following individuals in the following amounts:
+-----------------------------------------------------------------------------+
¦ ¦Dec. 1, ¦Dec. 24, ¦
+---------------------------------------------------+------------+------------¦
¦Individuals 1 ¦[FNi1961 ] ¦[FN 1962 ] ¦
+---------------------------------------------------+------------+------------¦
¦ ¦ ¦ ¦
+---------------------------------------------------+------------+------------¦
¦Gerhardt P. Faber ¦520 ¦490 ¦
+---------------------------------------------------+------------+------------¦
¦Elsie Faber ¦350 ¦365 ¦
+---------------------------------------------------+------------+------------¦
¦Alan Faber ¦180 ¦195 ¦
+---------------------------------------------------+------------+------------¦
¦Albert J. Faber ¦330 ¦195 ¦
+---------------------------------------------------+------------+------------¦
¦Jesse Douglas ¦72 ¦87 ¦
+---------------------------------------------------+------------+------------¦
¦Marilyn G. Douglas ¦72 ¦87 ¦
+---------------------------------------------------+------------+------------¦
¦Jesse and Marilyn Douglas in trust for Calvin ¦72 ¦87 ¦
¦Douglas ¦ ¦ ¦
+---------------------------------------------------+------------+------------¦
¦Jesse and Marilyn Douglas in trust for Dana Lynn ¦ ¦ ¦
+---------------------------------------------------+------------+------------¦
¦Douglas ¦72 ¦87 ¦
+---------------------------------------------------+------------+------------¦
¦Jesse and Marilyn Douglas in trust for Debra Ann ¦ ¦ ¦
+---------------------------------------------------+------------+------------¦
¦Douglas ¦72 ¦87 ¦
+---------------------------------------------------+------------+------------¦
¦Doris Farrell ¦72 ¦87 ¦
+---------------------------------------------------+------------+------------¦
¦Christopher W. Farrell ¦72 ¦87 ¦
+---------------------------------------------------+------------+------------¦
¦Christopher W. and Doris Farrell in trust for ¦ ¦ ¦
¦Stephen ¦ ¦ ¦
+---------------------------------------------------+------------+------------¦
¦Farrell ¦108 ¦123 ¦
+---------------------------------------------------+------------+------------¦
¦Christopher W. and Doris Farell in trust for Donald¦ ¦ ¦
+---------------------------------------------------+------------+------------¦
¦Farrell ¦108 ¦123 ¦
+---------------------------------------------------+------------+------------¦
¦Total class B stock outstanding ¦2,100 ¦2,100 ¦
+-----------------------------------------------------------------------------+
The Faber brothers had started in the cement and cinder block business on a part-time basis with very limited facilities. The business prospered, but, until late 1957, petitioner operated with hand machinery and increasingly inadequate facilities. Moreover, its equipment over the years, including the taxable periods involved herein, had been subjected to heavy use. In 1957, Faber Block opened expanded facilities at the same location in Paramus in order to meet the increasing demand for its products and to provide safer working conditions for its employees. Prior to such expansion, petitioner had been required to, and did, obtain a variance from the Paramus Zoning Board because of a local ordinance passed in 1956 which prohibited cement and cinder block manufacture, thus constituting petitioner's plant a nonconforming use.
Faber Block did a substantial amount of business in Rockland County, N.Y. In 1957, it decided to build a plant in Monsey, N.Y. Initially, the cost of such plant was estimated at approximately $500,000....
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