Chicago Stock Yards Co. v. Commissioner of Internal Revenue

• Decision Date: 24 July 1942
• Docket Number: No. 3730.,3730.
• Parties: CHICAGO STOCK YARDS CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — First Circuit

129 F.2d 937 (1942)

CHICAGO STOCK YARDS CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 3730.

Circuit Court of Appeals, First Circuit.

July 24, 1942.

COPYRIGHT MATERIAL OMITTED

Joseph N. Welch, of Boston, Mass., George Wharton Pepper, of Philadelphia, Pa., Francis B. Keeney, of Providence, R. I., Edward J. Keelan, Jr., and L. E. Green, both of Boston, Mass., and Frederick H. Spotts, of Philadelphia, Pa., and Hale & Dorr, of Boston, Mass., for petitioner for review.

Carleton Fox, Sp. Asst. to the Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., J. Louis Monarch, Sewall Key, and Helen R. Carloss, Sp. Assts. to the Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and Claude R. Marshall, Sp. Atty., Bureau of Internal Revenue, both of Washington, D.C., for Commissioner of Internal Revenue.

Before MAGRUDER, MAHONEY, and WOODBURY, Circuit Judges.

MAGRUDER, Circuit Judge.

This petition for review brings before us a decision of the Board of Tax Appeals entered March 29, 1941, determining that there are deficiencies in income tax of Chicago Stock Yards Company for the years 1930, 1932 and 1933 totaling $4,110,120.70 — for 1930, $1,817,686.10; for 1932, $1,145,322.68; for 1933, $1,147,111.92. The Board, four members dissenting, thus upheld a ruling by the Commissioner that petitioner had become subject to the 50% penalty tax (in addition to the normal corporate income tax) imposed upon corporations formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, as provided by the identical provisions of § 104 of the Revenue Acts of 1928 and 1932. 45 Stat. 814 — 15, 47 Stat. 195, 26 U.S.C.A. Int.Rev.Acts, pages 375, 508. Section 104 is copied in full in the footnote.¹

Petitioner is the top holding company of what is called the Chicago Stock Yards Enterprise, a great integrated business owning or operating a stockyard, a belt line railway, an elevated street railway, a real estate development of considerable magnitude, power and light facilities, a national bank serving the stockyard area, and other related undertakings of minor importance. A diagram showing the organization of the Chicago Stock Yards Enterprise as of December 31, 1933, appears on the annexed insert. Reference is made to the findings of fact of the Board below for details of the history and development of the numerous related corporations. 41 B.T.A. 590. The lines of development were dictated from time to time by legal and business requirements which need not be elaborated in this opinion.

The original operating company was the Union Stock Yards & Transit Company of Chicago, hereinafter referred to as the Transit Company, an Illinois corporation created in 1865, with a borrowing capacity limited by charter to $500,000. The greater part of the Transit Company's stockyard business was derived from the big meat packing companies which had plants in Chicago west of the stockyards, in an area known as Packingtown. In 1890 the packers threatened to move away unless they were given a share of the profits of the stockyards business; to underscore this threat they purchased and developed a tract of land in Indiana at a cost of about $1,000,000.

Since the Transit Company could not raise the funds necessary to buy off the packers, Mr. Frederick H. Prince and other Transit Company shareholders proposed the organization of a new corporation with sufficient resources to meet the emergency. As a result, the Chicago Junction Railways & Union Stock Yards Company, hereinafter called the Jersey Company, was incorporated in New Jersey in 1890, with a corporate life limited to expire on July 10, 1940. At all times its authorized and issued capital stock has consisted of 65,000 shares of preferred stock of $100 par value and 65,000 shares of common stock of $100 par value, each share of each class being entitled to one vote and the preferred stock being non-callable. It forthwith acquired 98% of the shares of the Transit Company, which, by the end of 1913, had become its wholly owned subsidiary. The Jersey Company in 1890 issued collateral trust bonds secured by Transit Company stock. It paid the various packers in cash and bonds the aggregate sum of $4,665,000 and thereby secured their commitment to keep their packing plants at Packingtown for a period of fifteen years.

With the expiration of the fifteen year period the packers were back again with their demands. Protracted negotiations followed. Finally, as a result of Prince's efforts, a new holding company for the enterprise, the petitioner, Chicago Stock Yards Company, was incorporated under the laws of Maine in 1911 with a cash capital of $1,000,000, and with broad power to purchase and lease real estate, to hold stocks and bonds of other corporations, to guarantee the obligations of others, and to carry on any other business which might seem to the company convenient to enhance the value of its properties. Prince became the owner of 80% of petitioner's capital stock, and Armour, the leading packer, the owner of 20%. The packers did not move away.

In 1920 Armour was ordered by a consent decree in the so-called Packers case to dispose of his shares in the Chicago Stock Yards Company. In 1922 Prince bought out Armour's shares in petitioner, with funds advanced by petitioner as a loan to Prince. Thus Prince became the sole stockholder in petitioner, and completely dominated its affairs thereafter. On June 1, 1932, F. H. Prince & Co., Inc., was organized under the laws of Maine, and its entire capital stock of 20,000 shares was issued for 48,000 common shares of petitioner owned by Prince. On June 3, 1932, Prince transferred to himself and his wife as trustees under a deed of trust, of which his relatives and friends were the beneficiaries, the 20,000 shares of F. H. Prince & Co., Inc., and since that date Prince has owned no stock in the latter company and the trustees have been the sole stockholders. This change in 1932 of the stock ownership in petitioner is assumed by both parties to be immaterial to the present litigation; in the deed of trust Prince reserved to himself the exclusive power to vote the 20,000 shares of stock of F. H. Prince & Co., Inc., and thus remained the dominant voice in petitioner.

Upon its formation in 1911 petitioner offered each common shareholder of the Jersey Company an option either (1) to have his common shares stamped with an agreement under which petitioner would guarantee such shareholder dividends of $9 per share on the Jersey Company common stock and the shareholder would assign to petitioner all dividends in excess of $9 per share, or (2) to exchange his shares for petitioner's 5% bonds on the basis of one share of Jersey Company common stock, par value $100, for $200 principal amount of petitioner's bonds, the bonds to be secured by the Jersey Company's common shares so exchanged. To provide for the purchase of all the Jersey Company's common stock under the second option above set forth, petitioner on October 2, 1911, executed a trust indenture authorizing the issuance of $13,000,000 5% 50-year callable gold bonds, secured by all the Jersey Company common shares owned or to be thereafter acquired by it. By August 31, 1914, petitioner had acquired in exchange for its bonds 31,075 Jersey Company common shares, and 33,922 shares had been stamped with the guaranty. During the succeeding years petitioner continually acquired more Jersey Company common stock, by purchase through the instrumentality of F. H. Prince & Co., a brokerage firm of which Prince was sole proprietor, and the principal business of which, apparently, was to facilitate operations of petitioner in connection with the stockyards enterprise. On December 31, 1929, petitioner had acquired 58,742 of the 65,000 shares outstanding. On December 31, 1933, it had acquired 60,336 shares, of which 31,310 were acquired in exchange for $6,262,000 par value of the petitioner's bonds and 29,026 for $4,979,352.19 in cash. In the years 1929-1933 petitioner acquired 2,362 shares of Jersey Company preferred stock at a total cost of $218,933.33; it had made no purchases of such stock prior to 1929.

At some indefinite time after petitioner's formation Prince set as a goal the liquidation of the Jersey Company upon the expiration of its charter in 1940, the payment at or before that date of all the debts of petitioner, the Jersey Company, and their subsidiaries, and the complete ownership by petitioner of the whole stockyards enterprise debt free, and with an adequate working capital. In his direction of the affairs of petitioner up through the end of 1933, the last tax year now in question, Prince drove consistently toward the attainment of that goal.

Prince has been president of petitioner from the start. He became president of the Jersey Company; also chairman of the board of the Transit Company and chairman of the board of the Chicago Junction Railway Company. He dictated the policies and supervised the operations of the Jersey Company and all of its subsidiaries as well as of the subsidiaries of petitioner. He was enabled to do this, as the Board stated in its opinion, "through ownership of all the stock of the petitioner, which had virtual control through stock ownership of the other corporations."

On October 1, 1914, petitioner and the Jersey Company made a so-called "By-Pass Agreement". Under this agreement the Maine Company guaranteed to the Jersey Company the payment of all the latter's expenses and the interest upon the Jersey Company's bonds; guaranteed all payments the Jersey Company might be required to make by virtue of its guaranty of the interest, but not the principal, of the real estate bonds of the Central Manufacturing District and of the bonds of the Chicago Junction Railroad Company (the Elevated Company);² and guaranteed...