American Pipe & Steel Corp. v. Commissioner of Int. Rev.

• Decision Date: 04 June 1957
• Docket Number: No. 15174.,15174.
• Citation: 243 F.2d 125
• Parties: AMERICAN PIPE & STEEL CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

243 F.2d 125 (1957)

AMERICAN PIPE & STEEL CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15174.

United States Court of Appeals Ninth Circuit.

April 17, 1957.

Rehearing Denied June 4, 1957.

M. Mitchell Bourquin, George DeLew, William B. Boone, San Francisco, Cal., for petitioner.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, I. Henry Kutz, Walter R. Gelles, Joseph F. Goetten, Washington, D. C., for respondent.

Before ORR, FEE, and BARNES, Circuit Judges.

ORR, Circuit Judge.

Petitioner is a corporation principally engaged in the steel fabricating business. In 1943 it acquired the capital stock of a corporation known as Palos Verdes Estates, Inc., hereafter Palos Verdes, and that company became a wholly-owned subsidiary of American Pipe. Thereafter, American Pipe and Palos Verdes filed consolidated returns for the years 1943, 1944, 1945, and 1946. The Commissioner of Internal Revenue determined a deficiency in the taxes paid under the consolidated returns for 1944, 1945, and 1946, by disallowance of the claimed tax benefits resulting from the acquisition of control of Palos Verdes. The Commissioner held that the principal purpose of the acquisition was to avoid or evade Federal income and excess profits taxes within the meaning of Section 129 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 129.

American Pipe petitioned the Tax Court for a redetermination of the deficiency. Issues were joined and a hearing had before the Tax Court, which resulted in the denial by that court of relief to American Pipe. We are called upon to review that decision.

The Tax Court seems to have incorporated into its findings a review of all the evidence introduced at the trial. It ultimately concluded that American Pipe had not met its burden of establishing that the holding by the Commissioner, that evasion or avoidance of income and excess profits taxes by securing the benefit of deductions, credits, or other allowances which it would not otherwise enjoy, was the principal purpose for which American Pipe acquired ownership of Palos Verdes, was erroneous.¹

In addition to the finding of failure of proof on the part of American Pipe, the Tax Court in its opinion made the following statement:

"The Commissioner having determined that the tax benefit to be gained was the principal purpose behind the acquisition, it was petitioner\'s burden to prove that such determination was erroneous. After a careful study of the record made, we have concluded that petitioner has not successfully carried his burden of proof. We have accordingly so found."

It is contended that the ultimate finding of the Tax Court, together with the quoted statement from its opinion, do not constitute an express and sufficient finding of fact upon which to base the Tax Court's decision. It is the contention of petitioner that the finding of the Tax Court does no more than say that the presumption of correctness which attaches to the determination of the Commissioner still stands in the case, and was not overcome. We do not so read the findings. The presumption necessarily disappeared upon the introduction of evidence. The Tax Court acted upon evidence produced by the petitioner and the Commissioner at the hearing, and took no account of the presumption; its findings are based on the evidence produced at the hearing.

Our attention is directed by petitioner to the case of Hemphill Schools, Inc., v. Commissioner, 9 Cir., 1943, 137 F.2d 961. That case is clearly distinguishable from the instant case. There the court was concerned with a determination by the Commissioner that the taxpayer corporation was availed of for the purpose of preventing the imposition of the surtax upon its shareholders within the meaning of Section 102 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 102, The Tax Court stated in that case:

"The evidence does not overcome the determination of respondent that petitioner was availed of for the purpose of preventing imposition of surtax upon its shareholders. * * *"

The Tax Court treated the determination of the Commissioner as evidence. No such situation appears here. The evidence adduced at the hearing was the sole consideration of the Tax Court. It found as follows:

"On the basis of the foregoing facts, we arrive at the ultimate conclusion that the evidence does not establish that respondent erred in holding that the evasion or avoidance of income or excess profits taxes by securing the benefits of deductions, credits or other allowances which it would not otherwise enjoy was the principal purpose for which American Pipe acquired the capital stock of Palos Verdes."

Petitioner, having invoked the jurisdiction of the Tax Court, entered the hearing burdened with the duty of establishing by at least a preponderance of the evidence that the determination made by the Commissioner was erroneous.² The Tax Court's finding in this respect is an express finding of failure of proof, which, if substantially supported by the evidence requires an affirmance of its decision.³

An examination of the record presents this picture:

With the onset of World War II, American Pipe was on the threshold of obtaining many profitable Government war contracts in the metal fabricating field. On September 3, 1942, it received a Government contract amounting to $3,500,000, for the manufacture of gas tanks. Although the contract was later cancelled by the Government in late 1943, the record discloses American Pipe had a backlog of Government prime and subcontracts of $124,603.29 on December 31, 1943, and a total of $1,892,144.92 of Government contracts awarded during 1944. In short, the prospective profits from war contracts loomed large for American Pipe.

Palos Verdes had been in poor financial condition since 1936. Its principal assets were 695 residential lots located near Palos Verdes, California. The lots had been held by the corporation for many...