Alterman Foods, Inc. v. U.S.

• Decision Date: 30 December 1974
• Docket Number: No. 73-3852,73-3852
• Citation: 505 F.2d 873
• Parties: 75-1 USTC P 9151 ALTERMAN FOODS, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 873

505 F.2d 873

75-1 USTC P 9151

ALTERMAN FOODS, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 73-3852.

United States Court of Appeals, Fifth Circuit.

Dec. 30, 1974, Rehearing and Rehearing En Banc Denied Jan. 13, 1975.

Cleburne E. Gregory, John C. Gray, Atlanta, Ga., for plaintiff-appellant.

Scott P. Crampton, Asst. Atty. Gen., Myron C. Baum, Atty., Meyer Rothwacks, Chief, App. Section, Tax Div., Dept. of Justice, Washington, D.C., John W. Stokes, U.S. Atty., Julian Longley, William D. Mallard, Jr., Asst. U.S. Attys., Atlanta, Ga., Gary R. Allen, Jay R. Weill, Attys., Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellee.

Before TUTTLE, THORNBERRY and SIMPSON, Circuit Judges.

TUTTLE, Circuit Judge:

This tax case involves a dispute over the legal effects of cash advances made to a parent corporation by a number of its wholly-owned subsidiaries, shown on the books of both the subsidiaries and parent as debts outstanding, but on which there were no interest charges, no set maturity date, no notes of indebtedness, nor any apparent legal compulsion to repay the amounts outstanding. No effort was ever made to force repayment on the part of any of the subsidiaries involved.

The Internal Revenue Service assessed a deficiency of $113,882.72 with interest of $18,193.78 on the theory that these advances were in fact dividends and thus were taxable income for the 1965 tax year. The present suit was filed seeking a refund and it was tried to a jury, which found for the plaintiff and against the government. The trial court entered judgment n.o.v. for the government, finding that the advances were in fact dividends and taxable as such. The taxpayer appeals, challenging the finding that these advances were not genuine debts, but disguised dividends. We affirm.

I.

Alterman Foods, Inc. (Alterman) is in the wholesale grocery business-- operating some 52 subsidiary corporations which in turn own and operate retail grocery outlets known as Big Apple Supermarkets. Some of the Big Apple corporations run more than one retail outlet, so that some 57 retail grocery outlets are involved in the case. Each Big Apple store had a separate manager, but the parent Alterman maintained books for all the corporations, and supervised day-to-day management.

The taxpayer Alterman and each Big Apple corporation at the time of each subsidiary's incorporation entered into an agreement whereby Alterman agreed to purchase and warehouse most of the store's inventory, furnish supervision, prepare payrolls and maintain all accounts and records, provide trucking services, maintain insurance coverage, conduct central advertising, and pay for all fixtures and other remodeling expenses or repairs which would be needed to maintain the store. In exchange for these services the subsidiary agreed to pay a management fee, in 1965 equalling approximately 3% Of gross sales, and in addition agreed to make advances to the parent upon demand. The terms of each of the contracts were uniformly as follows:

'You (the subsidiary) will advance to us (the parent) from time to time, upon our request, such funds as we may require, which will be credited to your account. Accountings shall be made and had between us from time to time, at such time as we may mutually agree upon.'

Three of the Alterman brothers active in the business served as executive officers for each of the 52 subsidiaries. Their method of operation was to transfer all proceeds save those funds needed for immediate operating expenses (such as payrolls) to the parent (the taxpayer), on a weekly or biweekly basis. Funds from each of the subsidiaries were then transferred to a central account, which the parent, Alterman, used for all its operating expenses. These expenses included not only those incurred on behalf of each of the subsidiaries which had debts outstanding, but for all other expenses incurred by Alterman in any of its business activities. Among the facets of Alterman's business largely unrelated to the Big Apple retail stores were a trucking concern, a real estate holding company, and a wholesale grocery business selling to other independent supermarkets, restaurants and public institutions.

At the end of the tax year in question, Alterman owed its subsidiaries the total of $3,723,006.00 and was owed in turn by its Big Apple subsidiaries a total of $1,614,223.00. ¹ The constructive dividends were assessed by the Internal Revenue Service for the advances from 27 of the 52 subsidiary corporations which showed a credit balance on May 1, 1965 in their current accounts with Alterman. The government assessed as a dividend the increase in each credit balance from the total of the year before. ² The legal issue before us is whether or not these advances were in fact genuine loans, in which case they would not be taxable to Alterman as a dividend, ³ and thus not includable in gross income. ⁴

II.

Naturally in considering the propriety of the trial court's entry of judgment n.o.v. we consider all the evidence, not just that evidence which supports the plaintiff's case, but do so in a light most favorable to the party opposing the motion. Boeing Co. v. Shipman, 411 F.2d 365 (5th Cir. 1969) (en banc). The cases are clear that the central issue here is the factual one of whether there was a definite intent to repay the advances. Chism's Estate v. Commissioner, 322 F.2d 956, 960 (9th Cir. 1963); Commissioner v. Makransky, 321 F.2d 598 (3d Cir. 1963); Oyster Shell Products Corp. v. Commissioner, 313 F.2d 449 (2d Cir. 1963); Spheeris v. Commissioner, 284 F.2d 928 (7th Cir. 1960), cert. denied, 366 U.S. 944, 81 S.Ct. 1673, 6 L.Ed.2d 855 (1961); Clark v. Commissioner, 266 F.2d 698, 710-711 (9th Cir. 1959); Roschuni v. Commissioner, 29 T.C. 1193 (1958); affirmed per curiam, 271 F.2d 267 (5th Cir. 1959), cert. denied, 362 U.S. 988, 80 S.Ct. 1074, 4 L.Ed.2d 1021 (1960).

This problem of recognizing genuine debt from spurious ones is one which arises in many contexts-- the most familiar being the vast line of so-called debt-equity cases, where the issue is whether an advance made by a shareholder to a corporation is a loan, or a contribution to capital. ⁵ This case involves a variation on the debt-equity problem, for here it is the corporation making advances to its sole shareholder, in this case its parent corporation.

The appellant taxpayer argues that to the extent the question of intent is a factual issue, that question is for the jury if the taxpayer asserts an intention to repay and thus arguably poses a credibility choice for the trier of fact to resolve. This argument has been rejected in a line of debt-equity cases decided by this Court, Tyler v. Tomlinson, 414 F.2d 844 (5th Cir. 1969); Berkowitz v. United States, 411 F.2d 818 (5th Cir. 1969). In these cases this Court recognized that it 'requires more than a mere declaration of intention to create an indebtedness and more than the existence of corporate paper encrusted with the appropriate nomenclatural captions,' Tyler v. Tomlinson, supra, 414 F.2d at 850, and concluded that 'it is not the jury's function to determine whether the undisputed operative facts add up to debt or equity. This is a question of law.' Berkowitz v. United States,supra, 411 F.2d at 821. We believe this analogous line of cases is controlling.

Like the debt-equity cases, many different factors are considered in determining whether an advance by a corporation to a shareholder is a loan or a dividend. ⁶ While the factors considered in debt-equity cases are to some extent dissimilar to those considered in corporate advance cases, due to the natural dissimilarity of the factual settings in which the cases occur, ⁷ the problem of resolving conflicts between the taxpayer's avowed intention to repay and his pattern of conduct indicating no intention to repay is identical in both types of cases. We believe the proper rule is that mere declarations by the parties that they intend a certain transaction to constitute a loan is insufficient if it fails to meet more reliable indicia of debt which indicate the 'intrinsic economic nature of the transaction.' Fin Hay Realty Co. v. United States, 398 F.2d 694, 697 (3d Cir. 1968).

The reason this rule has developed is largely because these cases typically arise in the context of a closely-held corporation, where the parties do not deal at arm's length. In this case the Alterman brothers act as the principal executive officers of both the parent corporation and its wholly-owned subsidiaries-- and it is highly unrealistic to expect them to enforce obligations against themselves.

Thus, whatever the terms of the agreement between the parent and its subsidiaries, the parent's complete control of the creditor subsidiaries 'will enable (it) to render nugatory the absolute language of any indebtedness.' P. M. Finance Corp. v. Commissioner, 302 F.2d 786, 789 (3d Cir. 1962). Where, as here, corporate advances are made to the corporation's sole stockholder, courts look with great care to the surrounding facts and view with some suspicion declarations of intent which have the effect of maximizing the tax benefit of that stockholder. Livernois Trust v. Commissioner, 433 F.2d 879, 881 (6th Cir. 1970); P. M. Finance Corp. v. Commissioner, supra; Albert Ravano, 26 T.C.M. 793, 799 (1967); Brake & Electric Sales Corp. v. United States, 185 F.Supp. 1, 3 (D.Mass.1960), affirmed, 287 F.2d 426 (1st Cir. 1961). 'We therefore look not to mere labels or to the self-serving declarations of the parties, but to the more reliable criteria of the circumstances surrounding the transaction. If none of these circumstances are in dispute, there is no jury question.' Tyler v. Tomlinson, supra, 414 F.2d at 850.

III.

Like United States v. Snyder Brothers Co., 367 F.2d 980 (5th Cir. 1966) cert. denied 386 U.S. 956, 87 S.Ct. 18, 1021 L.Ed.2d 104 (1967) we believe in this case the intent of the parties was ...