Bear Gulch Water Co. v. Commissioner of Int. Rev.

• Decision Date: 13 January 1941
• Docket Number: No. 9503.,9503.
• Citation: 116 F.2d 975
• Parties: BEAR GULCH WATER CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

116 F.2d 975 (1941)

BEAR GULCH WATER CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 9503.

Circuit Court of Appeals, Ninth Circuit.

January 13, 1941.

Herbert E. Hall, of San Francisco, Cal. (Calkins, Hall, Linforth & Conrad, of San Francisco, Cal., of counsel), for petitioner.

Samuel O. Clark Jr., Asst. U. S. Atty. Gen., and J. Louis Monarch, Berryman Green, and Morton K. Rothschild, Sp. Assts. to the Atty. Gen., for respondent.

Before DENMAN, MATHEWS, and HEALY, Circuit Judges.

MATHEWS, Circuit Judge.

Petitioner, Bear Gulch Water Company, a California corporation, had a net income of $50,099.61 in 1933 and a net income of $55,605.36 in 1934, but paid no federal income tax in either year, its contention being that its income was exempt from federal taxation. Rejecting this contention, respondent, the Commissioner of Internal Revenue, determined that petitioner owed a tax of $6,888.70 for 1933 and a tax of $7,645.74 for 1934. Respondent was sustained by the Board of Tax Appeals. 40 B. T. A. 1281. The Board's decision is here for review.

Petitioner contends that its income for 1933 and 1934 was exempt from federal taxation (1) because it was a corporation organized and operated exclusively for educational purposes, within the meaning of § 103(6) of the Revenue Act of 1932¹ and § 101(6) of the Revenue Act of 1934,² 26 U.S.C.A. Int.Rev.Code § 101 (6), and (2) because its income for 1933 and 1934 was income derived from a public utility and accruing to a State or political subdivision of a State, within the meaning of § 116(d) of the Revenue Acts of 1932 and 1934,³ 26 U. S.C.A. Int.Rev.Code § 116(d).

The Board found that petitioner was organized in 1889; that prior to 1900, 80 per cent of petitioner's capital stock was acquired by a corporation, The Regents of the University of California (hereinafter called Regents), existing under and by virtue of the Constitution of California;⁴ that thereafter, prior to 1920, Regents acquired the remaining 20 per cent of petitioner's stock; and that, in 1933 and 1934, all of petitioner's stock was owned and held by Regents. The Board did not find that petitioner was organized or operated for any educational purpose. Instead, the Board found: "* * * Petitioner was organized * * * for the purpose of acquiring land and water rights; constructing canals, ditches, reservoirs, and pipe lines; erecting water works; and operating a water distributing system. During the years 1933 and 1934, and during prior years, petitioner was engaged in the business of distributing and selling water to residents of the communities of Menlo Park, Atherton, and Woodside, in San Mateo County, California. The water distributing system of petitioner is located exclusively in San Mateo County. The University of California, which is located in Alameda County, and is separated from San Mateo County by San Francisco Bay, is not served with water by petitioner. The business office of petitioner is located at Menlo Park. At this office petitioner employs a business manager and ten other employees. * * * Receipts from the sale of water to private consumers constituted the entire and sole source of petitioner's income in 1933 and 1934. * * * Petitioner's business was a business enterprise conducted for gain."

The findings are supported by substantial evidence, and hence are conclusive. Phillips v. Commissioner, 283 U.S. 589, 600, 51 S.Ct. 608, 75 L.Ed. 1289; Burnet v. Leininger, 285 U.S. 136, 138, 52 S.Ct. 345, 76 L.Ed. 665; Helvering v. Rankin, 295 U.S. 123, 131, 55 S.Ct. 732, 79 L.Ed. 1343; Elmhurst Cemetery Co. v. Commissioner, 300 U.S. 37, 40, 57 S.Ct. 324, 81 L.Ed. 491; Helvering v. Tex-Penn Oil Co., 300 U.S. 481, 490, 57 S.Ct. 569, 81 L.Ed. 755; Palmer v. Commissioner, 302 U.S. 63, 70, 58 S.Ct. 67, 82 L.Ed. 50; Helvering v. National Grocery Co., 304 U.S. 282, 294, 58 S.Ct. 932, 82 L.Ed. 1346; Colorado National Bank v. Commissioner, 305 U.S. 23, 25, 59 S.Ct. 48, 83 L.Ed. 20; Helvering v. F. & R. Lazarus & Co., 308 U.S. 252, 255, 60 S. Ct. 209, 84 L.Ed. 226. It follows that petitioner was not within the exemption of §§ 103(6) and 101(6), supra.

The Board found: "During 1933 petitioner did not declare any dividends, and, consequently, no income was received by the University⁵ from petitioner." Thus it is clear that, in 1933, no part of petitioner's income accrued to Regents. For, although Regents was petitioner's sole stockholder, petitioner's income was not Regents' income and did not accrue to Regents until a dividend payable therefrom was declared by petitioner. Burnet v. Commonwealth Improvement Co., 287 U.S. 415, 418-420, 53 S.Ct. 198, 77 L.Ed. 399. See, also, Lynch v. Hornby, 247 U.S. 339, 343, 38 S.Ct. 543, 62 L.Ed. 1149; Eisner v. Macomber, 252 U.S. 189, 208, 40 S.Ct. 189, 64 L.Ed. 521, 9 A.L.R. 1570.

There was no finding, nor any evidence warranting a finding, that petitioner was merged with or became a part of Regents (cf. Southern Pacific Co. v. Lowe, 247 U.S. 330, 333-339, 38 S.Ct. 540, 62 L.Ed. 1142), or that petitioner and Regents were parts of one enterprise (cf. Gulf Oil Corp. v. Lewellyn, 248 U.S. 71, 72, 39 S.Ct. 35, 63 L.Ed. 133). The case is clearly within the rule of Burnet v. Commonwealth Improvement Co., supra.

The Board properly refused to disregard the existence of petitioner as an entity separate and apart from Regents, for it did not appear that petitioner was Regents' alter ego,⁶ or that to recognize petitioner's separate existence would promote fraud, defeat justice or produce inequitable results....