611 F.2d 866 (Fed. Cir. 1979), 50-76, Alterman Foods, Inc. v. United States
| Citation | 611 F.2d 866 |
| Party Name | ALTERMAN FOODS, INC. v. The UNITED STATES. |
| Case Date | December 12, 1979 |
| Court | U.S. Claims Court |
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Timothy R. Askew, Jr., Atlanta, Ga., for plaintiff, Cleburne E. Gregory, Jr., Atlanta, Ga., attorney of record. Arnall, Golden & Gregory and Cleburne E. Gregory, III, Atlanta, Ga., of counsel.
Robert N. Dorosin, Washington, D. C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D. C., for defendant. Theodore D. Peyser, Jr., and Robert S. Watkins, Washington, D. C., of counsel.
Before KASHIWA, KUNZIG and BENNETT, Judges.
OPINION
PER CURIAM:
This case comes before the court on plaintiff's exceptions, to the recommended decision of Trial Judge David Schwartz, filed January 29, 1979, pursuant to Rule 134(h), having been submitted to the court on the briefs and oral argument of counsel.
The court recognizes that under I.R.C. section 316 a corporation must have sufficient earnings and profits before a constructive dividend can be found to exist; retained earnings are considered in this opinion solely to analyze plaintiff's intent. Since the burden is on the plaintiff to disprove the Commissioner of Internal Revenue's
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determination (E. I. DuPont De Nemours and Co. v. United States, Ct.Cl., 608 F.2d 445 (1979), and since plaintiff did not allege an insufficiency of earnings and profits, we are satisfied sufficient earnings and profits were available to constitute constructive dividends in the amounts found by the trial judge.
Upon consideration of the trial judge's decision, the briefs and oral argument of counsel, and the above paragraph inserted by the court, since the court agrees with the trial judge's recommended decision, as hereinafter set forth, [*] it hereby affirms and adopts the decision as the basis for its judgment in this case. Accordingly, as set forth in the following conclusion of law, plaintiff's petition is dismissed.
OPINION OF TRIAL JUDGE
SCHWARTZ, Trial Judge:
This is a suit for refund of income taxes. The question, familiar in the law of tax liabilities of stockholders in controlled corporations, is whether advances by corporate subsidiaries to their sole stockholder, the plaintiff-taxpayer, were loans to the taxpayer, as alleged by it, or constructive dividends and thus taxable income, as maintained by the Commissioner.
In 1966-74, plaintiff Alterman Foods, Inc., owned all the stock of some 57 subsidiaries engaged in the operation of a chain of retail grocery supermarkets in the Atlanta area. The markets grew in the years involved from 59 in 1965 to 95 in 1974.
Each subsidiary signed a management agreement, under which the plaintiff sold to it, at cost, merchandise, fixtures, remodeling and construction and insurance. All other needed services warehousing, advertising, management and supervision, legal, accounting and office services and supplies, as well as licenses for the use of store and product tradenames were provided for a fee of 21/2 percent of gross sales. In addition, and this provision is the source of the present case, the subsidiaries were required to advance to the plaintiff their gross receipts, from which the plaintiff would pay itself the amounts due for merchandise, repairs and the other services provided.
Accounts of the advances and expenditures were kept by both parent and subsidiary. The balances fluctuated on a periodic and annual basis as advances were received by the parent and expenditures made by it and debited against the advances. The net advances, I. e., the excess of advances by the subsidiary over expenditures by plaintiff on behalf of the subsidiary, were in plaintiff's financial and tax returns treated as accounts payable, under liabilities, and in the books of the subsidiary as accounts receivable, under assets.
Not all subsidiaries in all the tax years added to their net advances. Advances might decline as against expenditures by the parent, resulting in a decrease in the year-end balance of net advances or even a reversal from a balance of net advances to one in which plaintiff's expenditures on behalf of the subsidiary exceeded the advances. This occurred in years in which a subsidiary was operating an unprofitable market, in years in which plaintiff made substantial capital expenditures for remodeling of a market, or in years of both such characteristics.
Nevertheless, the aggregate of net advances from all subsidiaries grew as the years continued to be profitable in the overall. In the tax years 1966-74, the aggregate retained earnings of the 57 subsidiaries steadily increased by $12.1 million from $6.5 million at the end of 1965 to $18.6 million at the end of 1974. Paralleling this increase, the aggregate balance of net advances grew from.$1.6 million at the end of 1965 to $6.5 million in 1970 and 1971 and then declined to $5.8 million in 1972-74.
In computing the amounts of advances to be taxed as dividends, the Commissioner did not aggregate all advances by the subsidiaries as against all expenditures by the
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plaintiff, and then tax as dividends the net balance. He treated each subsidiary as a separate entity and, generally speaking, assessed deficiencies to the extent of the increase in a tax year of the net advances by a subsidiary to the plaintiff. He did not, however, assess a deficiency in cases of advances in a year which merely reduced the prior year's excess of expenditures over advances. He treated as a constructive dividend only an increase from a beginning annual balance of net advances to a greater year-end such balance. And where the beginning balance showed an excess of expenditures over advances, the Commissioner treated as a constructive dividend only the increase from a zero balance to the year-end balance of net advances. The annual increases in net advances thus treated by the Commissioner as constructive dividends was.$9.4 million.
The same case was presented as is here presented and the same contentions were made in plaintiff's suit for a refund with respect to the tax year 1965, the year immediately preceding the years now in suit. In that case, the Court of Appeals for the Fifth Circuit affirmed the action of the district court in setting aside a verdict for the plaintiff and entering judgment for the Government. Alterman Foods, Inc. v. United States, 505 F.2d 873 (5th Cir. 1974). The plaintiff here contends that factual differences distinguish the present case from that for the year 1965. On examination, the differences seem inconsequential; the cases are essentially the same. The decision by the Fifth Circuit is both persuasive and confirmatory of the decision made on the record here.
The inquiry whether corporate funds have passed to a shareholder as bona fide loans, creating a creditor-debtor relationship, depends on whether the parties definitely intended that the sums advanced would be repaid. Alterman Foods, Inc. v. United States, supra, 505 F.2d 873, 875-76 (5th Cir. 1974); Chism's Estate v. Commissioner, 322 F.2d 956, 959-60 (9th Cir. 1963); Clark v. Commissioner, 266 F.2d 698, 710-11 (9th Cir. 1959).
Intent is to be determined on consideration of all the circumstances. These include, the Fifth Circuit noted, the extent to which the shareholder controls the corporation; the earnings and dividend history of the corporation; the magnitude of the advances; and presence or absence of conventional indicia of debt such as the giving of a note or security, a maturity date, a ceiling on the advances and effort and ability to repay or to require repayment. 505 F.2d at 877, n. 7.
To these factors might be added the treatment of the advances in corporate financial statements and tax returns; whether interest was charged or paid on the balances; and in some instances, the use to which the shareholder put the advances. Rabkin & Johnson, 2 Federal Income, Gift and Estate Taxation, s 21.05(6) (1978). No single factor is, of course, determinative. Together all the factors may convey whether repayment or indefinite retention was intended. Koufman v. Commissioner, 35 TCM (CCH) 1509, 1523 (1976); Livernois Trust v. Commissioner, 433 F.2d 879, 882 (6th Cir. 1970); Dynamics Corp. of America v. United States, 183 Ct.Cl. 101, 110, 392 F.2d 241, 247 (1968); see Note, Stockholder Withdrawals Loans or Dividends?, 10 Tax L.Rev. 569 (1954-55).
The setting and the controlling relationships are perhaps the first circumstance to be considered. All the factors must be assessed in the context, here, of the 100 percent ownership by the shareholder of the stock of the subsidiaries. Members of the founding family were the owners of approximately 50 percent of the stock of the parent and were also the directors and officers of both the parent and subsidiaries.
No doubt an advance by corporation to a controlling shareholder can constitute a loan, as in Nasser...
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