American Trading & Production Corp. v. United States

• Decision Date: 25 April 1972
• Docket Number: Civ. A. No. 70-1266-M.
• Citation: 362 F. Supp. 801
• Parties: AMERICAN TRADING AND PRODUCTION CORPORATION v. UNITED STATES of America.
• Court: U.S. District Court — District of Maryland

362 F. Supp. 801

AMERICAN TRADING AND PRODUCTION CORPORATION v. UNITED STATES of America.

Civ. A. No. 70-1266-M.

United States District Court, D. Maryland.

April 25, 1972.

COPYRIGHT MATERIAL OMITTED

John S. McDaniel, Jr., and Lawrence A. Kaufman and Cable, McDaniel, Bowie & Bond, Baltimore, Md., Carolyn E. Agger, Walter J. Rockler, Steven P. Lockman, and Arnold & Porter, Washington, D. C., for plaintiff.

Edward J. Snyder, Atty., Dept. of Justice, Washington, D. C., George Beall, U. S. Atty., and Michael E. Marr, Asst. U. S. Atty., Baltimore, Md., for defendant.

OPINION^*

JAMES R. MILLER, Jr., District Judge.

This case is a suit by American Trading and Production Corporation,^** a Maryland corporation, against the United States of America to recover the sum of $1,238,446.65, consisting of an accumulated earnings tax of $387,387.32, plus interest of $130,793.63 for the calendar year 1963, plus an accumulated earnings tax of $563,751.34 and interest thereon of $156,514.36 for the calendar year 1964, which amounts were paid by the plaintiff to the United States of America on or about October 31, 1969.

Jurisdiction is conferred by 28 U.S.C. Section 1346(a)(1); and venue is proper in this court under 28 U.S.C. Section 1402(a)(2).

The case has been well prepared and tried by counsel, and this fact has been of great assistance to the court in determining the issues in this case.

This being an accumulated earnings tax case, it is decided basically on its own facts. The cases state the issues in such a suit, to recover taxes paid, which were imposed under Section 531, revolve primarily around the facts and circumstances in each case. No hard and fast rule can be stated which applies in every situation.

The court adopts the proposed findings of fact, which I will enumerate in a moment, to the extent that such proposed findings of fact do not conflict with any express finding which I make in this oral opinion.

The court adopts, as its findings of fact, the following, which are taken from, except to the extent amended, the plaintiff's proposed findings of fact and the government's findings of fact.

The court adopts findings of fact from the plaintiff's proposed findings of fact Nos. 1 through 17; the court adopts government's proposed finding No. 16; plaintiff's proposed findings Nos. 18 through 27, and plaintiff's proposed finding No. 28 with the amendment at the beginning of the next to the last sentence of that finding, plaintiff's No. 28, the court inserts the following language: "By the period of 1963-64." The rest will read as set forth therein.

The court adopts further plaintiff's proposed findings Nos. 29 through 45, and adopts plaintiff's proposed finding No. 46 with this amendment, that at the end of the sentence which reads "At the end of 1964 Atapco's total investment in Charles Street Development Corporation was $794,806"; the court adds the following: "of which $90,406 was paid in capital for stock."

The court further adopts plaintiff's proposed findings Nos. 47 through 53. The court adopts government's proposed findings Nos. 34, 35, and 39. The court adopts plaintiff's proposed findings of fact numbered 54, 55, 56, and 56(a) through 66.

The court adopts plaintiff's proposed finding No. 67, with the amendment in the next to the last sentence by insertion of the word "probably" immediately prior to the word "been" so that the sentence would read: "Also, some reduction from market price would have probably been involved."

The court further adopts proposed findings of the plaintiff Nos. 68 through 74.

Section 531 of the Internal Revenue Code, Title 26 U.S.C., imposes a tax on the accumulated taxable income of certain corporations.

Section 532 of said Code provides that the tax applies to every corporation with certain exceptions not here applicable "formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed."

In the court's view, the key words in this section and the essence of the tax are (1) "purpose of avoiding the income tax" and (2) "permitting earnings and profits to accumulate." Two elements are, therefore, essential for there to be a tax under Section 531, that is, the purpose of avoiding the income tax in respect to the shareholders and, two, an accumulation of earnings and profits as the vehicle for avoiding said tax.

Section 533 provides that if earnings and profits of a corporation are accumulated beyond the reasonable needs of the business of that corporation, the purpose of shareholder tax avoidance is presumed, but the presumption is rebuttable by a preponderance of the evidence to the contrary.

Section 535(a) of the Code defines accumulated taxable income as taxable income subject to certain adjustments less the sum of dividends paid deduction and the accumulated earnings credit. Subsection (c)(1) of Section 535 defines accumulated earnings credit in part as so much of the earnings and profits of the taxable year as are retained for the reasonable needs of the business.

Section 537(a)(1) defines reasonable needs of the business as including "reasonably anticipated needs of the business." (Emphasis supplied).

In every case, the recitation of the legal principles involved is easier than applying those principles to the facts. As previously stated, the facts are all important in each case of this type. The Supreme Court in United States v. Donruss has indicated that the purpose of the tax imposed by Section 531 is to compel the corporation to distribute any profits not needed for the conduct of its business so that, when distributed, the individual stockholders will become liable for taxes on the dividends received by them. (393 U.S. 297 at 303, 89 S.Ct. 501, 21 L.Ed.2d 495). The Court went on at 307, 89 S.Ct. at 507 to eliminate preexisting conflicts between the various circuits, by stating that the tax avoidance purpose necessary to a Section 531 tax need not be the ". . . dominant, impelling, or controlling" purpose of accumulations of earnings and profits.

Going now, in this case, to the ultimate findings, this court is of the view that there was no tax avoidance purpose within the meaning of Sections 531 and 532 in the actions of the plaintiff corporation in the taxable years 1963 and 1964.

The court's opinion, in this regard, is reached after consideration of the various exhibits, stipulations and items of testimony presented during this case as well as the arguments of the respective parties. It is important, in the court's view that Atapco, during the period of at least 1958 through 1962, had a record of a consistent policy of paying dividends to its stockholders. The record is irrefutable, and, in fact, it is admitted by the government that no Section 531 tax could have been imposed for the tax years 1958 through 1962 for the reason that in each of those years there was a loss under Section 535.

In 1958, a dividend of $648,518 was paid, although for the purposes of Section 535, there was a loss of $1,129,493.

Similarly, in 1959, the dividend was paid of $376,842 with a Section 535 loss of $1,817,850.

In 1960, a dividend was paid of $367,027, although there was a Section 535 loss of $1,750,503.

In 1961 and 1962, the same dividend was paid in each of those years, with the Section 535 losses respectively being for those years, $578,387 and $2,931,226. These dividend payments in those years had the effect of substantially increasing the income taxes of the stockholders of Atapco for those years.

In addition, it is noteworthy that no loans were outstanding to the stockholders of Atapco at the end of the tax year 1963 or at the end of the tax year 1964. To the contrary, the corporation owed its stockholders approximately $300,000 at the end of 1963, which sum remained substantially unpaid at the end of the tax year 1964.

Also, it should be noted that during those years of 1963 and '64, there were no investments of corporate earnings and profits earned in those years in assets or businesses unrelated to the business of Atapco.

Additionally, there is the uncontradicted testimony of Dr. Morton Blaustein, now the president of the corporation, and the vice president thereof, during the years in question that tax considerations to the shareholders did not play a part in determining the payment of or amount of dividends paid by the corporation.

The court recognizes the principle expressed in many cases that the self-serving statements of stockholders or corporate officers are not necessarily determinative of the issue of purpose in a Section 531 case. However, where the objective facts are consistent with the testimony of those persons who participated in and are most thoroughly conversant with the decisions which are in issue, such testimony should be taken into consideration by the court in reaching its ultimate conclusion.

Dr. Blaustein testified that decisions on dividend payments were reached near the end of each taxable year, primarily and exclusively, on two criteria. The first was the needs of the business and the second was the needs of the stockholders, substantially all of whom were members of the same family.

In his testimony, Dr. Blaustein explained that there were some members of his family who depended on dividend income from the tax paying corporation for living expenses. This testimony is consistent with the facts that dividends were paid even in years in which there were taxable losses which would have allowed the corporation with tax impunity to have ignored the payment of dividends. As a matter of fact, some argument was made by the plaintiff with apparent merit that the shareholders of Atapco would, in fact, have had a lesser tax liability if no dividends had been paid by Atapco in the years 1958 through 1962, and had, instead, been paid in the years 1963 and 1964, with, of...