Cargill v. United States, Civil Action No. 238.

• Decision Date: 12 September 1942
• Docket Number: Civil Action No. 238.
• Citation: 46 F. Supp. 712
• Parties: CARGILL, Inc., et al. v. UNITED STATES.
• Court: U.S. District Court — District of Delaware

46 F. Supp. 712

CARGILL, Inc., et al. v. UNITED STATES.

Civil Action No. 238.

District Court, D. Delaware.

September 12, 1942.

Albert G. Egermayer, of Minneapolis, Minn., and Hering, Morris, James & Hitchens, of Wilmington, Del., for plaintiffs.

Samuel O. Clark, Jr., Asst. Atty. Gen., Andrew D. Sharpe and J. Leonard Lyons, Sp. Assts. to Atty. Gen., and Stewart Lynch, U. S. Atty., of Wilmington, Del., for defendant.

LEAHY, District Judge.

This is a suit for a refund of excess profits taxes for the year 1934 alleged to have been erroneously paid by plaintiff Warehouse Company.¹

In August of 1934, Warehouse Company filed its capital stock tax return for the year ending June 30, 1934. In the belief that it was not doing business for the preceding taxable year,² it claimed exemption for the payment of the capital stock tax and stated its capital stock valuation as "none".

Warehouse Company's income and excess profits tax return for the calendar year 1934 reported a net income of $149,384.77 but showed no excess profits tax liability because — on its theory that it was not doing business prior to June 30, 1934, and was therefore not subject to the capital stock tax for the year ending on that date — it was likewise not subject to the excess profits tax.³

In filing its capital stock return for the year ending June 30, 1935, Warehouse Company purported to declare an original value of $3,000,000 and accordingly paid a capital stock tax in the amount of $3,000.

By letter dated January 24, 1936, the Commissioner of Internal Revenue advised Warehouse Company that its claim for exemption for 1934 was denied, and that it was bound by its declaration of "none" as its capital stock valuation. A deficiency totalling $9,368.62 was assessed on the 1934 income and paid under protest. The present suit is for refund of this amount.⁴

The sole issue in the case is whether Warehouse Company was "carrying on or doing business" prior to June 30, 1934, as those words are used in Section 701 of the Revenue Act of 1934.

Warehouse Company was incorporated on June 15, 1934. According to plaintiffs, the sole reason for its creation was to operate certain terminal grain warehouses in which was stored grain belonging to various Cargill companies and pledged to banks as security for loans. It was deemed advisable to divorce possession from ownership of the pledged property.

The first meeting of Warehouse Company was a meeting of the incorporators⁵ in Wilmington, Delaware, on June 18, 1934. In conformity with Delaware law and corporate practice, by-laws were adopted, and a Board of Directors was elected and given authority to issue the entire authorized stock of 24,000 shares at par.

The directors held their first meeting in Minneapolis, Minnesota, on June 27, 1934. They went through the ritual required by Delaware law. They elected officers, provided for the opening of bank accounts in Minnesota and in New York City, and designated a principal office and resident agent in Wilmington, Delaware.

But ritual ended there. The directors proceeded to authorize establishment of offices in Marshall, Minnesota; Omaha, Nebraska; Superior, Wisconsin; Milwaukee, Wisconsin; Green Bay, Wisconsin; Chicago, Illinois; Buffalo, New York; Albany, New York; and Ogdensburg, New York. They then accepted the offer of Elevator Company to purchase the entire authorized issue of Warehouse Company stock — 24,000 shares — at $100 par, payable in cash.

At the same meeting, the directors approved an offer to be made for the purchase from Elevator Company of the following assets: (1) Its elevators, along with their equipment and supplies, (2) all the shares of stock of Cargill Grain Company of Nebraska, Incorporated, and of Cargill Carriers, Incorporated, and (3) a claim against Cargill Grain Company of Nebraska. They also authorized an offer to purchase elevators, equipment and supplies from Cargill Grain Company for an amount equal to the value reflected on the books of Cargill Grain Company as of June 30, 1934. Payment for these properties was to be in cash, and Warehouse Company was to assume all outstanding grain receipts issued by the selling companies.

Elevator Company, in turn, held a special meeting of its board of directors on the same day — June 27, 1934. This board authorized the purchase of Warehouse Company's stock issue of 24,000 shares on the terms heretofore recited. At the same meeting, they also accepted Warehouse Company's offer to purchase the property referred to. Also, on the same day, the directors of Cargill Grain Company held a meeting and accepted the offer of Warehouse Company to purchase its property.

On the next day, Elevator Company delivered its check for $2,400,000 to Warehouse Company, and the Chase National Bank of New York City credited Warehouse Company's account with this amount on June 30, 1934. On June 30, 1934, Warehouse Company paid to Elevator Company and Cargill Grain Company $1,375,000 and $900,000 respectively, representing the purchase price of the assets bought from those companies. On the same day, it received a dividend of $68,674.78 from Cargill Grain Company of Nebraska, Incorporated.

If the functions of Warehouse Company from June 15 to June 30, 1934, as above disclosed, were confined to perfecting its corporate organization under the laws of Delaware, then it was not doing business, and no tax is due. But, if it had completed its period of legal gestation prior to July 1, 1934, and had actually entered into the world of business by that date, then the tax is due.⁶

It is agreed that Warehouse Company acquired the right to get title and possession of the properties purchased by reason of the transactions set out above, all of which took place between June 15 and June 30, 1934. Plaintiffs nevertheless deny that Warehouse Company was doing business because it had no personnel other than officers and directors. They contend that it had not yet entered into the field of activity for which it had been organized, since it had not as yet secured legal title to the property, assumed the outstanding grain receipts issued by Elevator Company and Cargill Grain Company, or taken any new grain into their elevators.

The tax here involved is not a tax on income. It is, on the contrary, a tax on the exercise of corporate functions. An early Supreme Court case involving the question was Flint v. Stone Tracy Co., 220 U.S. 107, 31 S.Ct. 342, 357, 55 L.Ed. 389, Ann.Cas.1912B, 1312. The Court sustained the corporation tax law under the Tariff Act of 1909 as a valid excise tax on doing business in the corporate form and said: "`Business' is a very comprehensive term and embraces everything about which a person can be employed. Black's Law Dict., 158, citing People v. Commissioners of Taxes, 23 N.Y. 242, 244. `That which occupies the time, attention, and labor of men for the purpose of a livelihood or profit.' 1 Bouvier's Law Dictionary, p. 273." This broad definition has generally been followed in the cases, which have used it as the basis for a broad test of "doing business".⁷ Indeed, the Supreme Court indicated its insistence upon such a test when it reversed a holding of the Circuit Court of Appeals for this Circuit in International Salt Co. v. Phillips, 3 Cir., 9 F.2d 389, that a holding company receiving and distributing dividends, endorsing notes of a company whose stock it owned, and purchasing bonds, was not doing business within the stock tax provisions of the Revenue Act of 1918. Phillips v. International Salt Company, 274 U. S. 718, 47 S.Ct. 589, 71 L.Ed. 1323. In a later case, Harmar Coal Co. v. Heiner, 3 Cir., 34 F.2d 725, 728, certiorari denied 280 U.S. 610, 50 S.Ct. 159, 74 L.Ed. 653, Judge Woolley suggested a test to determine whether a corporation was doing business. He said: "* * * a corporation, organized for a definite though limited business purpose involving profits, that pursues activities to carry out that purpose, no matter how few or small they may be, is carrying on or doing business within the meaning of the statute."

The tax is not imposed upon the doing of a particular type of business. Hence, I reject the argument that Warehouse Company was not subject to the tax until it actually began the operation of the grain enterprises. Clearly, under the cases cited, it suffices that it exercised its charter power to purchase elevators and warehouses for handling grain by entering into contracts involving substantial sums; that it voted to establish nine branch offices in several States; and that it opened bank accounts in two different States with, in fact, a credit with one of the banks on June 30, 1934, in the amount of $2,400,000. I think a review of all the facts, as I have related them, compels the conclusion that Warehouse Company by June 30, 1934, had commenced its flight into the commercial field, and was operating under the profit motive. Tested by the rule pronounced by Judge Woolley in Harmer Coal Co. v. Heiner, supra, it was "doing business."

Plaintiffs rely on General Ribbon Mills v. Higgins, 2 Cir., 115 F.2d 472; Mode O'Day Corp. v. Rogan, D.C., 32 F.Supp. 571; and Nicholas v. Colorado Fuel & Iron Corp., 10 Cir., 112 F.2d 858, 860. These cases are obviously inapposite. In the General Ribbon Mills case, the company had completed its organization on June 17, 1936, but its object — the acquisition of the assets of other corporations to be paid for in stock — could not be accomplished before July 1, 1936, because the consent of the Commissioner of Corporations, required under California law before the stock could be issued, was not obtained until after June 30, 1936. The company involved in the Mode O'Day Corp. case simply issued its stock in exchange for stock in another company. Its object, the acquisition of assets of another corporation, was not attained until after June 30, 1937. The court held, and properly so, that the issuance of stock in exchange for stock was no different from...