Britt v. United States

• Decision Date: 14 May 1970
• Docket Number: No. 27310.,27310.
• Citation: 431 F.2d 227
• Parties: T. M. BRITT and Jane Britt et al., Plaintiffs-Appellants, v. The UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

431 F.2d 227 (1970)

T. M. BRITT and Jane Britt et al., Plaintiffs-Appellants, v. The UNITED STATES of America, Defendant-Appellee.

No. 27310.

United States Court of Appeals, Fifth Circuit.

May 14, 1970.

M. W. Wells, Jr., James A. Moreland, Orlando, Fla., for plaintiffs-appellants.

Edward F. Boardman, U. S. Atty., Tampa, Fla., Mitchell Rogovin, Johnnie M. Walters, Asst. Attys. Gen., Eugene P. Kopp, H. Stennis Little, Jr., Lee A. Jackson, Robert I. Waxman, Attys., Tax

Div., U. S. Dept. of Justice, Washington, D. C., for defendant-appellee.

Before TUTTLE, WISDOM and BELL, Circuit Judges.

WISDOM, Circuit Judge:

This tax refund case involves the difficult application of the rule that income from property must be taxed to the individual who, in substance, is the owner of the property generating the income. Helvering v. Horst, 1940, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75. Here, the taxpayers transferred the property in question to three corporations. The district court found that as a matter of law the level of business activity was not sufficient to require recognition of the corporations as separate taxable entities. The district court therefore disregarded the existence of the corporations as separate taxable entities and held that the income attributable to the corporations in 1959, 1960, and 1961 was attributable to the individual taxpayers and should be included as part of their taxable income for the years in question. Britt v. United States, M.D.Fla.1968, 292 F.Supp. 6. We reverse.

I.

The case was tried upon a stipulation of facts. Because of the nature of the case, we feel that it is important to go into the facts at some length.

T. M. Britt and Harold M. Britt are brothers¹ who have been in partnership since 1952 doing business as the Britt Fruit Company (Company). The Company is engaged in the business of operating citrus groves and of providing grove caretaking services. The assets of the Company are composed primarily of citrus groves and of grove caretaking equipment. The marketing of fruit from the Company's groves is handled largely through a local farm cooperative. From time to time the Company acquired stock in this cooperative.

The Florida Citrus Production Credit Association and The Federal Land Bank have supplied most of the capital essential to the Company's operations. Since 1953, the Company has maintained loans with the Credit Association and with every loan, the Company has been required to purchase shares of Class A stock of the Credit Association.

Originally, T. M. Britt and Harold M. Britt each owned an undivided fifty percent interest in the Company. In 1958, T. M. Britt transferred an undivided four percent interest in the business and assets of the Company to his son, Thomas E. Britt. The transfer was a gift on Thomas's twenty-first birthday.²

September 27, 1958, T. M. Britt and Harold M. Britt organized three Florida corporations: Tommy Britt Corporation, Connie Corporation, and Harold M. Britt, Inc. The corporations were formed for three purposes: (1) To encourage T. M. Britt's children to take an active interest in the operations of the Company; (2) To provide the children with additional income; and (3) To facilitate T. M. Britt's and Harold M. Britt's estate planning. The corporations were formed at the suggestion of T. M. Britt's accountant, Mr. Robert F. Stonerock. Mr. Stonerock advised T. M. Britt of the legal problems and accounting difficulties inherent in transferring fractional interests in the partnership businesses. The use of the corporate form was suggested to avoid the legal and accounting problems and to facilitate the anticipated transfers to the children.

October 1, 1958, T. M. Britt transferred to each corporation, in exchange for its capital stock, a fourteen percent interest in the Company and in each of the assets of the Company. The transfer was made in exchange for one thousand shares in each corporation. Harold M. Britt transferred an undivided twenty-one percent interest in exchange for one thousand shares in Harold M. Britt, Inc. The net effect of the transfers was that each corporation became a partner in the Britt Fruit Company.³ All federal tax returns filed by the partnership have reflected the ownership of the undivided interests owned by the three corporations.

Since their inception the corporations have continued to maintain their de jure status under the laws of the State of Florida. The corporations have filed all required state tax returns and an annual Corporate Stock Tax return with the Secretary of State of Florida. All taxes which have been shown to be due have been paid.

The corporations have maintained checking accounts in the First National Bank of Winter Garden, Winter Garden, Florida. Checks drawn on these accounts reflect payment of corporate obligations: Attorney's fees and cost for organization expenses, payment of income tax, payment of state capital stock tax, and payment of accounting fees to a Certified Public Accountant for preparing the annual income tax return of each corporation. Deposits to these accounts represent distribution of cash from the Company.

As partners in the Company, the corporations have been required to join in the execution of all commercial and financial documents relating to the Company. Since their organization, the Credit Association has included all three corporations as co-owners of the partnership property. The Credit Association has required each corporation to join in the execution of all notes and mortgages relating to the partnership property. After October 1, 1958, every loan application, note, and mortgage reflects that the Britt Fruit Company is named for T. M. Britt, Harold M. Britt, Thomas Britt, Connie Corporation, Tommy Britt Corporation, and Harold M. Britt, Inc. Before the Credit Association would approve loans to the Company, the corporations were required to furnish a certified copy of a corporate "Resolution to Borrow," executed by the officers of each corporation. With every loan, each corporation has been required to purchase shares of Class A stock of the Credit Association. The records of the Credit Association indicate that Tommy Britt Corporation, Connie Corporation, and Harold M. Britt, Inc., together own 847 shares of Class A stock, and that dividends totalling over $250 have been paid to these corporations. This money has been deposited in the corporations' checking accounts at the First National Bank in Winter Garden, Florida. The Credit Association has required the yearly filing of financial statements by the Company and by each of its members. This requirement has necessitated the employment of an accountant by each of the corporations.

December 1959, T. M. Britt transferred sixty shares of stock of Tommy Britt Corporation to Thomas Britt. One year later, an additional forty shares were transferred. Identical transfers of Connie Corporation stock were made to Constance Britt. December 1960, Harold M. Britt transferred five shares each to Thomas and Constance Britt and ten shares to his sister, Eula Britt Grant.

At the end of the first tax year, a corporate income tax return was filed by each of the corporations. At the beginning of their second tax year, October 1959, Tommy and Connie Corporations filed elections to be taxed as Subchapter S corporations.⁴ An election was again made in October 1960.⁵ Harold M. Britt, Inc. did not elect to be taxed as a Subchapter S corporation during any of the years in question.

The two corporations, Tommy and Connie Corporations, filed the required small business corporation income tax returns and the income reported was included in the individual income tax returns of all of the shareholders of each corporation for the calendar years 1960 and 1961.

The Commissioner of Internal Revenue determined that the income reported by Tommy and Connie Corporations and, after the Subchapter S election, by each minority shareholder, was taxable to T. M. Britt in his capacity as partner in the Britt Fruit Company. The Commissioner, however, recognized Thomas Britt's undivided four percent interest in the Company that his father transferred to him in 1958. Based on this determination, a deficiency was assessed against T. M. Britt for each of the years in question. The Commissioner additionally determined that the income attributable to Harold M. Britt, Inc. was taxable to Harold M. Britt in his capacity as partner in the Company.

After paying the assessed deficiency, the taxpayers filed claims for refunds alleging that the determination of additional tax liability erroneously disregarded the separate corporate entities of the Florida corporations and erroneously caused to be included in the taxpayers' individual income, the distributable share of income of each corporation from the Britt Fruit Company. The District Director disallowed the taxpayers' claims for refunds. The taxpayers then brought suits for refunds in the district court.

At the trial, the taxpayers did not dispute the fact that the corporations were formed for the purpose of providing a vehicle through which T. M. Britt and his brother could attempt to interest both Thomas and Constance Britt to take an active part in the management and operation of the Company. Nor was there any question that the use of the corporate structure was employed to facilitate T. M. Britt's and Harold Britt's own estate planning. The taxpayers argued for the recognition of the corporations as separate taxable entities on three grounds.

First, the taxpayers argued that the activities of the corporations constituted a sufficient amount of business activity to require recognition as separate taxable entities. Second, since capital is a material income-producing factor for the Britt Fruit Company, Section 704(e) (1) of the Internal Revenue Code of 1954⁶ requires that each corporation be recognized as a partner in the Company. The taxpayers' third argument is twofold. At the time of the...