Bay Sound Transportation Co. v. United States

• Citation: 350 F. Supp. 420
• Decision Date: 26 May 1972
• Docket Number: No. 63-H-73.,63-H-73.
• Parties: BAY SOUND TRANSPORTATION CO. v. UNITED STATES of America.
• Court: U.S. District Court — Southern District of Texas

350 F. Supp. 420

BAY SOUND TRANSPORTATION CO. v. UNITED STATES of America.^*

No. 63-H-73.

United States District Court, S. D. Texas, Houston Division.

May 26, 1972.

Masquelette, Bailey, Donisi & Haynes, John A. Bailey, Houston, Tex., for plaintiffs.

Charles G. Barnett, Atty., Tax Div., Dept. of Justice, Dallas, Tex., for Government.

MEMORANDUM OPINION AND SUPPLEMENTAL FINDINGS OF FACT

HANNAY, District Judge.

These cases were tried to the Court without a jury. The Plaintiffs appealed to the United States Court of Appeals for the Fifth Circuit and that Court affirmed in part and remanded in part these cases for further proceedings not inconsistent with the determination of the appellate court. Plaintiffs thereafter filed a petition for a writ of certiorari with the United States Supreme Court and that petition was denied.

The only question now presented for determination by this Court is whether the principal purpose motivating the separate incorporation of the various barges and vessels acquired by the Edwards fleet¹ in 1955 and subsequent years was the evasion or avoidance of federal income taxes by securing the benefit of multiple surtax exemptions.

STATUTES INVOLVED

The statute pertinent to the unresolved issue in this case is set forth in the Appendix, infra.

See Bay Sound Transportation Company v. United States, (5 Cir.) 410 F.2d 505 at page 512:

"Section 269 provides that if any person acquires control of a corporation and the principal purpose of this acquisition is evasion of income taxes by securing the benefit of a deduction, credit, or other allowance, which he would not otherwise enjoy, then the deduction credit or allowance may be disallowed. The determination of the taxpayer's principal purpose in incorporation is a question of fact that depends upon the intent of the taxpayer at the time he acquires control of the corporation. See Airport Grove Corp. of Polk County, et al. v. United States of America, 5 Cir., 1969, 408 F.2d 870. The taxpayer has the burden of proving that control was not acquired for the unlawful purpose. American Pipe & Steel Corp. v. Commissioner, 243 F.2d 125 (9 Cir., 1957)."

In Bobsee Corporation v. United States, 411 F.2d 231 at 238, the Fifth Circuit held:

"The proscription of section 269 obtains where the principal purpose for the acquisition of a corporation is tax avoidance. The IRS has determined that each of the appellant corporations was organized for the principal purpose of obtaining the surtax exemption and this determination is presumptively correct.2 The burden

2. Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212 (1933).

of proving that tax avoidance was not the principal purpose is on the taxpayer.3 Theoretically the question of

3. Green Light Co. v. United States, 405 F.2d 1068, 1070 (5th Cir. 1968); Dorba Homes, Inc. v. Commissioner of Internal Revenue, 403 F.2d 502, 505 (2d Cir. 1968).

purpose is purely subjective; pragmatically, however, the trier of fact can only determine purpose from objective facts. Thus, unless the taxpayer can muster facts sufficiently plausible to convince the trier of the purity of his motives, the IRS will prevail.

"Under the definition of `control' in subsection 269(a), the presence of a principal tax-avoidance purpose on behalf of any fifty-percent interest in an acquired corporation renders the corporation subject to disallowance of the surtax exemption. Of course, the purpose of the actual fifty-percent shareholder may in certain circumstances be completely irrelevant. For example, if a business manager attends to all the details of a business— including the organization of corporate forms—the owner's mind might be a perfect tabula rasa. The relevant `mind' is the person who actually has a purpose, that is, other than the general purpose of making money.4

4. Classical analysis would probably deem the general desire to make money a motive rather than a purpose. See Blum, Motive, Intent, and Purpose in Federal Income Taxation, 34 U.Chi.L. Rev. 485, 486-87 (1967). However, since triers of fact are not likely to observe such refinements, the terms are treated as synonymous in this largely pragmatic analysis.

Thus the statute cannot be sidestepped by merely divorcing purpose from ownership.5

5. In Dorba Homes, Inc. v. Commissioner of Internal Revenue, 403 F.2d 502 (2d Cir. 1968), the controlling owners of two corporations—Lumar Homes, Inc. and Dewmar Construction Co., Inc.—were the wives of the actual promoters. The Second Circuit held that, since the wives did not appear and testify on behalf of the taxpayer-corporations, the IRS could not prevail because the ownership of the controlling shares could not be attributed to the husbands. Id. 506-507. We cannot accept this analysis for two reasons. First, the burden of proof is on the corporations to prove that tax avoidance was not the principal purpose of their formation; if the purpose of the controlling owners is relevant and they do not come forward on behalf of the corporations, then the IRS must prevail. And second, the facts surrounding the formation of both wives' corporations indicate that the wives' purpose, if any was irrelevant.

"This court has held that the principal purpose is the purpose which exceeds all other purposes in importance.6 Citing Treas.Reg. § 1.269-3

6. Green Light Co. v. United States, 405 F.2d 1068, 1070 (5th Cir. 1968).

(1962), both parties state a standard different from the one adopted by the court, viz., that a purpose is the principal purpose if it exceeds in importance any other one purpose."

See Shaw Construction Co. v. C. I. R., 323 F.2d 316 and cases which are therein cited. U. S. Court of Appeals, Ninth Circuit, 1963.

In the Atlas Storage Company v. United States, (D.C.W.Va.) 306 F.Supp. 570 at 581, the Court stated:

"In any event, however, even if it be conceded that the advantages itemized by Maier were legitimate business purposes for this corporate arrangement, they are not sufficient to carry the day for the taxpayers in this litigation in the light of the overwhelming evidence of the tax advantages obtained thereby. It is not necessary under the statute that tax avoidance be the sole purpose of the arrangement, but only that it be the `principal purpose.' See J. T. Slocomb Co. v. C. I. R. (2 Cir. 1964) 334 F.2d 269 supra. As heretofore pointed out, the burden rests upon the taxpayer to show that such avoidance was not the principal purpose of the acquisition, and under the evidence in this case, it is my conclusion that the taxpayers have failed to carry that burden. Accordingly, it is my further conclusion that the taxpayer corporations were acquired for the principal purpose of evading or avoiding federal income taxes within the meaning of Section 269 of the Internal Revenue Code of 1954 and that the Commissioner of Internal Revenue properly disallowed the surtax exemption for the several taxpayer corporations except for one corporation in each of the three geographical areas."

The Atlas case was affirmed by the Fourth Circuit in 1971. See 437 F.2d 1319. This opinion which involved some eighteen warehouse corporations controlled by one person was affirmed as to fifteen of the eighteen warehouse corporations.

In Airport Grove Corp. of Polk County v. United States, 408 F.2d 870 (1969), decided by the Fifth Circuit in 1969, the Court wrote regarding some fifteen citrus groves separately incorporated that:

"Section 269 provides that if any person acquires control of a corporation and the principal purpose of this acquisition is evasion of income taxes by securing the benefit of a deduction, credit, or other allowance which he would not otherwise enjoy, then the deduction, credit, or allowance may be disallowed. The determination of the taxpayer's principal purpose in incorporation is a question of fact that depends upon the intent of the taxpayer at the time he acquires control of the corporation. See Southland Corp. v. Campbell, 5 Cir. 1966, 358 F.2d 333, 337; Green Light Co. v. United States, 5 Cir. 1968, 405 F.2d 1068. 7 Mertens, Law of Federal Income Taxation § 38.69 (1967). The Taxpayer has the burden of proving that control was not acquired for the unlawful purpose. American Pipe & Steel Corp. v. Commissioner of Internal Revenue, 9 Cir. 1957, 243 F.2d 125."

In Bobsee Corporation v. United States, (5th Cir., 1969) 411 F.2d 231, at page 238, "control" is defined as follows:

"Under the definition of "control" in subsection 269(a), the presence of a principal tax-avoidance purpose on behalf of any fifty-percent interest in an acquired corporation renders the corporation subject to disallowance of the surtax exemption."

Coming now to the questions of fact. While this Court has carefully examined, reviewed and studied the statement of facts in this case consisting of more than 1,827 pages of testimony and in addition thereto the pleadings and the exhibits, it is thought best to restate some of the testimony with reference to the question of multiple corporation issue: C. W. Edwards was the master mind and the ultimate decision maker in the organization of the eighteen new vessels incorporated. He alone let the contracts for the construction of the vessels and as they were completed and delivered, the corporations took title. The vessels were then placed in service with the Edwards fleet. Of the 20 corporations organized between 1955 and 1960, 14 each owned one barge, and 6 each owned one boat. (G. Exs. 7 & 8, pars. 37, 38, 44, 46, 48, 49, 50, 52, 54, 56, 58, 60, 62, 63, 65, 67, 69, 71, 73, 75, 76 and 77). Mr. Edwards was the major stockholder and chief executive officer of all the said corporations except the two in which his son was major stockholder and chief executive officer. None of the barge corporations had any employees. The only employees of the boat corporation other than members of the crews, are as follow:

                   Name of employee           Name of corporation-employer
                Keith Edwards

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