Ach v. CIR

• Decision Date: 30 March 1966
• Docket Number: No. 16154-16156,16229.,16154-16156
• Parties: Pauline W. ACH, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ESTATE of Ernest M. ACH, Deceased, Pauline W. Ach, Sole Legatee, and Pauline W. Ach, Surviving Wife, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. The ACH CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. The ACH CORPORATION, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

358 F.2d 342 (1966)

Pauline W. ACH, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ESTATE of Ernest M. ACH, Deceased, Pauline W. Ach, Sole Legatee, and Pauline W. Ach, Surviving Wife, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

The ACH CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. The ACH CORPORATION, Respondent.

Nos. 16154-16156, 16229.

United States Court of Appeals Sixth Circuit.

March 30, 1966.

William R. Seaman, Cincinnati, Ohio (H. J. Siebenthaler, Ronald E. Heinlen, Cincinnati, Ohio, on the brief; Frost & Jacobs, Cincinnati, Ohio, of counsel), for Ach.

William A. Friedlander, Atty., Dept. of Justice, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, I. Henry Kutz, Attys., Dept. of Justice, Washington, D. C., on the brief), for Commissioner.

Before WEICK, Chief Judge, CELEBREZZE, Circuit Judge, and CECIL, Senior Circuit Judge.

CECIL, Senior Circuit Judge.

These cases are before the Court on petitions for review of decisions of the Tax Court of the United States. The petitioners and taxpayers are: Pauline W. Ach in docket No. 16,154, Estate of Ernest M. Ach, deceased, Pauline W. Ach, sole legatee and Pauline W. Ach, surviving wife in docket No. 16,155 and the Ach Corporation in docket No. 16,156. The Commissioner of Internal Revenue, respondent herein, determined deficiencies in income tax against the above named taxpayers and they brought actions in the Tax Court for a redetermination of those deficiencies.

The claimed deficiencies grow out of the inter-related dealings between Ernest M. Ach, his wife, Pauline W. Ach, and their two sons, Roger and Laurence. These dealings disclose a family plan the obvious purpose of which was to avoid or minimize the income tax of the husband and wife. It is perfectly proper for individuals and corporations to arrange their business affairs so as to minimize taxes and in the cases now before us the transactions were open and aboveboard and no fraud is claimed. The question presented here is whether the transactions involved came within any statutory prohibitions of the Internal Revenue Code.

The facts are fully stated in the Findings of Facts and Opinion of the Tax Court reported at 42 T.C. 114. Briefly stated, the pertinent facts of the family transactions may be summarized as follows: Prior to and through mid 1953, the son Roger owned all of the stock (300 shares) of Rising Sun Creamery Company, an Ohio Corporation. The stated purpose of the corporation was to deal in dairy products. Roger had operated the business at a substantial loss each year and at the end of the year 1953, the cumulative indebtedness amounted to $282,700. This indebtedness was evidenced by notes with interest payable to Ernest Ach, the father, who had covered the yearly losses.

At the time now under consideration and for a number of years prior thereto, Pauline operated a dress shop in Cincinnati under the name of Vogues and Vanities. This was, and had been, a successful business, netting profits of $25,000 to $30,000, a year, with the indication that profits were rising.

On April 23, 1953, the corporation changed its name to the Ach Corporation. It also changed its stated corporation purposes from a dairy products business to broad, general purposes which would include the operation of the dress business of Vogues and Vanities. The dairy business was discontinued prior to August 1, 1953. On or about July 14, 1953, Roger, pursuant to his parents' suggestion, transferred to his brother Laurence, without consideration, 149 shares of the corporation's common stock. All of the shares of the Corporation were transferred to Pauline by Roger and Laurence, without consideration, in May 1959. At this time the corporation's net operating loss was no longer available as a carry over against income.

On or about August 1, 1953, Pauline became president, treasurer, and chairman of the board of directors of the Ach Corporation. She was not then a shareholder of record. On that date, at a special meeting of the Board of Directors, she offered to sell to the Corporation her Vogues and Vanities business for $30,705.57, to be paid for by a demand note of the Corporation without interest. The agreed purchase price was the book value of the business. The offer was accepted and the transfer was made.

Pauline continued to manage the business under the name of Vogues and Vanities. There was no ostensible change in the conduct of the business. Pauline received no salary from either the business or the corporation. Roger and Laurence, the sole shareholders of the corporation, were engaged in other business ventures not related to the dress business. They took no active part in the operation of Vogues and Vanities. The profits of the business, under Pauline's continued management, were channeled through the corporation and were used first to pay to Pauline the purchase price of the business as evidenced by the corporation's demand note to her and second to pay the corporation's notes to Ernest. The profits thus realized by the corporation were offset against the carry over losses of the dairy business and no income tax was paid for the years in question.

The respondent took the position that the transfer should be disregarded as fiction and that all of the profits of Vogues and Vanities should be allocated to Pauline under Section 482, Title 26, U.S.C. He also ruled that the loss carryover should be disallowed under Section 269, Title 26, U.S.C. The deficiencies were determined on this basis. The petitioners challenged these rulings and brought their actions in the Tax Court for a redetermination of the tax.

The Tax Court did not follow the respondent on the first ruling above mentioned. It found that, "The corporation was actually in existence, and there was a genuine transfer of assets to it that were actually used in the conduct of the dress business." While we might take a different view if this question were initially before us, we cannot say that this finding is clearly erroneous. Rule 52(a) F.R. Civ.P., Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218.

Judge Raum of the Tax Court wrote a comprehensive opinion covering the issues raised by the petitioners in that court. (42 T.C. 122) We are in accord with the opinion of Judge Raum and find no need to repeat the discussion of the issues before the Tax Court.

The petitioners argue before this Court that the amount of profits allocated to Pauline was not based on any intelligible method of calculating the income attributable to her and that the Court's decision was wholly arbitrary. We are of the opinion that there was ample evidence to support the decision of the Tax Court. Under the evidence, we think that the amount of profits allocated to Pauline was minimal and that it might well have been greater. In Cohen v. Commissioner of Internal Revenue, 266 F.2d 5, 12, C.A. 9, the court said:

"We neither state nor imply that the Tax Court\'s redetermination must be predicated upon precisely established income and expense figures. Since Cohan v. Commissioner of Internal Revenue, 2 Cir., 39 F.2d 540, it has been the recognized rule that absolute certainty is not required. It is sufficient if the Tax Court makes as close an approximation as it reasonably can. The Tax Court\'s

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