Cataphote Corp. of Mississippi v. United States, 103-73.

• Decision Date: 12 May 1976
• Docket Number: No. 103-73.,103-73.
• Citation: 535 F.2d 1225
• Parties: CATAPHOTE CORPORATION OF MISSISSIPPI v. The UNITED STATES.
• Court: U.S. Claims Court

535 F.2d 1225

CATAPHOTE CORPORATION OF MISSISSIPPI v. The UNITED STATES.

No. 103-73.

United States Court of Claims.

May 12, 1976.

COPYRIGHT MATERIAL OMITTED

Jack Rephan, Washington, D. C., atty. of record, for plaintiff; David J. Harris, Harry L. Hickson, Smith, Cohen, Ringel, Kohler, Martin & Lowe, Atlanta, Ga., and Danzansky, Dickey, Tydings, Quint & Gordon, Washington, D. C., of counsel.

William Kalish, Washington, D. C., with whom was Asst. Atty. Gen. Scott P. Crampton, Washington, D. C., for defendant; Theodore D. Peyser, Jr., Washington, D. C., of counsel.

Before COWEN, Chief Judge, and NICHOLS and KUNZIG, Judges.

OPINION

PER CURIAM:

This case comes before the court on defendant's motion, filed February 4, 1976, for judgment, moving that the court adopt, as the basis for its judgment in this case the recommended decision of Trial Judge Philip R. Miller, filed October 9, 1975, pursuant to Rule 134(h), defendant having filed no notice of intention to except thereto and plaintiff, on January 30, 1976, having withdrawn its previously filed notice of intention to except thereto. Upon consideration thereof, without oral argument, since the court agrees with the recommended decision, as hereinafter set forth,^* it hereby grants defendant's motion and affirms and adopts the decision as the basis for its judgment in this case. Therefore, it is concluded that plaintiff is not entitled to recover and plaintiff's petition is dismissed.

OPINION OF TRIAL JUDGE

MILLER, Trial Judge:

Sections 531 and 532 of the Internal Revenue Code impose the accumulated earnings tax upon the accumulated taxable income of every corporation formed or availed of for the purpose of avoiding the income tax with respect to its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed. Section 533 provides that the fact that the earnings and profits are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the income tax with respect to shareholders, unless the corporation by the preponderance of the evidence shall prove to the contrary.

The purpose of this statute has been simply put in a recent Supreme Court decision (Ivan Allen Co. v. United States, 422 U.S. 617, 624-25, 95 S.Ct. 2501, 2505, 45 L.Ed.2d 435 (1975)):

Because of the disparity between the corporate tax rates and the higher gradations of the rates on individuals, a corporation may be utilized to reduce significantly its shareholders' overall tax liability by accumulating earnings beyond the reasonable needs of the business. * *

In order to foreclose this possibility of using the corporation as a means of avoiding the income tax on dividends to the shareholders, every Revenue Act since the adoption of the Sixteenth Amendment in 1913 has imposed a tax upon unnecessary accumulations of corporate earnings effected for the purpose of insulating shareholders. Footnotes omitted.

In the application of the statute the forbidden purpose need not be the sole, dominant, controlling, or impelling motive; it is sufficient if it is one of the motives for the accumulation. United States v. Donruss Co., 393 U.S. 297, 89 S.Ct. 501, 21 L.Ed.2d 495 (1969).

Plaintiff having been subjected to the assessment and payments of such taxes in the sums of $32,217 and $19,849 for its fiscal years ended June 30, 1968 and 1969, respectively (hereinafter 1968 and 1969), it now sues for their refund.

Cataphote Corporation of Mississippi (Mississippi or plaintiff) is an affiliate of Cataphote Corporation of Ohio (Ohio). During the taxable years in issue Ohio was engaged in the manufacture and sale of glass beads, plastics, paints and other traffic control equipment. The stock of Ohio was owned almost entirely by the Searight family. William Searight, the head of the family, who in 1968 was 76 years of age, held 42 percent in his own name and proxies for 23 percent more owned by his daughter. His son, Charles Searight, held 15 percent in his own name and another 15 percent as custodian for his children. The remaining 5 percent was owned by the daughter's children. William Searight was chairman of the board and chief executive officer, while Charles was president.

At the same time Charles was sole stockholder and president of plaintiff; William, who owned no stock in plaintiff, was vice-president; and Bob J. Young, who owned no stock in either corporation but was plant accountant, purchasing agent and traffic manager for Ohio, was secretary-treasurer of plaintiff.

It was Mississippi's business or function to lease trucks from Ryder Truck Rental, Inc., of Jackson, Mississippi, a national leasing organization, under a contract for full service and maintenance by Ryder, and in turn sublease them to Ohio for the transportation of some finished merchandise from Ohio's manufacturing plant in Jackson, Mississippi (where 95 percent of its shipments originated) to its customers throughout the country, and also for the transportation of some raw materials from Ohio's suppliers to its plant. Mississippi had no employees other than its officers mentioned above, nor separate premises.

Under the prime lease Ryder provided maintenance, repairs, parts, fuel, oil, lubricants, tires, and all other operating supplies and accessories in return for a flat charge per mile with a minimum requirement of 130,000 miles use per vehicle per year. The lease was for a 3-year term with the right in either party to terminate a vehicle after 1 year. In the event of such termination by plaintiff it had the obligation to purchase the vehicle at the original value less accrued scheduled depreciation. The lease was renewed by plaintiff at 3-year intervals with new vehicles and was last renewed for the period May 1969 to 1972 when it covered six vehicles. The contemporaneous sublease from plaintiff to Ohio was substantially the same, except for the method and rate of compensation. It was not measured by the operating mileage but was either an amount equal to the minimum rail freight charges (where Ohio had the option to ship by rail), or the lowest commodity or other commercial freight rate, whichever was smaller; and with respect to incoming shipments priced on a delivered basis, was equal to the actual freight charges allowed by the supplier.

The sublease did not prescribe the full terms of the arrangement between Ohio and Mississippi, however. Even though the truck drivers were employees of Ohio, Mississippi bore the economic burden of their wages. Plaintiff billed Ohio pursuant to the terms of the sublease but Ohio offset the billing by the amounts it had paid the truck drivers on a round-trip mileage basis and for employment taxes and insurance on the drivers. Such offsets were approximately $117,000 for 1968 and $109,000 for 1969. On the other hand, although the trucks were subleased to Ohio, Mississippi was entitled to the entire proceeds of carrying loads for third persons on the return trips. Plaintiff earned $31,371 on backhaul revenues from third persons for 1968 and $40,209 for 1969.

The sublease arrangement did not cover all of Ohio's shipping requirements but only those shipments which Mississippi chose to accept, representing about 50 percent of Ohio's needs. The election was purely up to plaintiff. If the common carrier rate for a particular trip which Mississippi was required to match was not sufficiently high to return a suitable profit to plaintiff, Ohio had to find a common carrier. On the other hand, where the commercial rates were higher, or where plaintiff was able to negotiate a return load for its own benefit to enhance its profit, it would elect to allow Ohio to use the leased equipment for that trip. Since the charge was the same whether plaintiff or a common carrier handled the load, it made no difference to Ohio as to which was used.

Charles Searight's duties in connection with plaintiff's trucking operations involved the selection of the trucking equipment to be rented from Ryder, negotiating the Ryder lease, renting additional trucks in peak season, assuring Ryder's carrying out its maintenance and repair obligations, ascertaining which of Ohio's loads were available and deciding which ones the trucks should carry, and organizing backhauls by telephone through brokers at the destinations. Young assisted him in this regard and in addition kept the books. The line between their duties for plaintiff and for Ohio was somewhat unclear. It was sometimes difficult for either of them to know when he was working for Mississippi and when he was working for Ohio. It necessitated a legal conclusion rather than a factual determination. Indeed there is a conflict between the testimony of Charles Searight and Young, the former stating that his supervision of the drivers was in his capacity as president of Ohio and the latter understanding that his supervisory duties as subordinate to Searight were on behalf of plaintiff, rather than as traffic manager of Ohio. Furthermore, when either had to decide whether to route a particular shipment via leased trucks with drivers paid by Ohio and reimbursed by Mississippi, or by common carrier, it was obviously difficult to know when his duties for plaintiff began and those for Ohio ended.

The entire space plaintiff occupied was the one-room office on the premises of Ohio's plant, which also served as Charles Searight's and Young's office as employees of Ohio. Plaintiff paid neither rent, compensation for the use of its secretarial help, nor reimbursement for local or long distance telephone bills, although Ohio's telephone was used to negotiate the backhauls from distant destinations for plaintiff's exclusive benefit.

The amorphous nature of the relationship between the two corporations is epitomized by the fact that the sublease between Mississippi and Ohio was signed for Ohio by Charles Searight, who was president and sole stockholder of plaintiff, and for...