CIR v. Riss

• Decision Date: 10 March 1967
• Docket Number: 18470.,No. 18466,18467,18469,18466
• Citation: 374 F.2d 161
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Richard R. RISS, Sr., Respondent. Richard R. RISS, Sr., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent (two cases). Richard R. RISS, Sr. and Helen G. Riss, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

374 F.2d 161 (1967)

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Richard R. RISS, Sr., Respondent.

Richard R. RISS, Sr., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent (two cases).

Richard R. RISS, Sr. and Helen G. Riss, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 18466, 18467, 18469, 18470.

United States Court of Appeals Eighth Circuit.

March 10, 1967.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Guy A. Magruder, Jr., of Terrell, Van Osdol & Magruder, Kansas City, Mo., for petitioners Richard R. Riss, Sr., and Transport Manufacturing & Equipment Co. of Delaware.

Lawrence B. Silver, Atty., Tax Div., Dept. of Justice, Washington, D. C., for Commissioner of Internal Revenue; Mitchell Rogovin, Asst. Atty. Gen., and Lee A. Jackson and Harry Baum, Attys., Tax Div., Dept. of Justice, Washington, D. C., on the brief.

Before VAN OOSTERHOUT, GIBSON and HEANEY, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

Taxpayer Richard R. Riss, Sr.,¹ has filed timely petitions for review of the decisions of the Tax Court entered March 8, 1966, in cases Nos. 18,467, 18,469 and 18,470. These cases were consolidated for trial in the Tax Court and are consolidated here. The Tax Court's opinion, T. C. Memo 1964-190, is unofficially reported in 23 CCH TCM 1113. The petitions before us challenge only the validity of the Tax Court's determination of additional income tax liability of Richard R. Riss, Sr., for individual income tax for the years 1952 to 1956, inclusive. The Tax Court's opinion includes determination of tax liability in other respects not challenged in the present petitions and also treats tax liability of Transport Manufacturing & Equipment Company (T. M. & E.) and Riss & Company in which taxpayer had substantial interests.²

The Commissioner took a protective cross-appeal in case No. 18,466 which he has abandoned and hence such cross-appeal is dismissed.³

Proper venue for these petitions is conceded. Jurisdiction is conferred upon this court by 26 U.S.C.A. § 7482(a).

The material facts, many of which are stipulated, are quite fully set out in the Tax Court's opinion. We shall briefly summarize the factual background. Taxpayer Richard R. Riss, Sr., is a resident of Kansas City, Missouri. He has filed timely income tax returns for the years in controversy. Taxpayer was the chief executive officer of Riss & Company and T. M. & E. in the years in controversy.

Riss & Company, a corporation, was a common carrier engaged in extensive interstate motor freight transportation under Interstate Commerce Commission authority. T. M. & E., a corporation, owned and leased to Riss & Company most of the transportation equipment and truck terminals used by it and engaged in some similar business with others.

Taxpayer owned all the voting stock of Riss & Company. His children and grandchildren owned the majority of the non-voting stock of such company.

T. M. & E. had 202 shares of voting stock outstanding from 1952 to 1955. Taxpayer owned 51 to 52 shares of such stock. Each of his three children, Robert, Richard II and Louise II, owned 50 shares. Taxpayer was board chairman. His son Richard II was president until 1955 when he resigned and sold his 50 shares of stock to the corporation. Such stock apparently was retired. Thus the taxpayer owned approximately 26% of the stock prior to 1955 and 34% of the stock during the remainder of 1955 and 1956. Other facts will be developed hereinafter where material.

Taxpayer in his petitions before us asserts that the Tax Court erred in determining his individual tax liability for the years 1952 to 1956, inclusive, in the following respects:

1. Charging him with taxable individual income in the form of constructive dividends on the following items:

(a) Expenses and depreciation above $300 per month rent paid on State Line residence, owned by T. M. & E., and occupied by taxpayer\'s former wife and daughter.

(b) Value of use plus insurance and operating costs of automobiles furnished by T. M. & E. to taxpayer\'s former wife and to his sister.

(c) $1000 per year for taxpayer\'s personal use of Cadillac automobile provided by Riss & Company.

(d) 75% of Kansas City Club bills paid by Riss & Company which is the percentage of such bills which was disallowed to Riss & Company as a business expense.

(e) Expense of Puerto Rico trip which was disallowed to Riss & Company as a business expense.

2. Erroneous computation of allowable depreciation upon a DC 4 airplane.

3. Erroneous determination that "time payments" received by taxpayer under DC-4 lease were to be treated as ordinary income.

The general principles applicable to review of Tax Court decisions are well-established. Decisions of the Tax Court are reviewable in the same manner and to the same extent as decisions of the District Court in civil actions without a jury. 26 U.S.C.A. § 7482. The clearly erroneous standard applies. If the findings are supported by substantial evidence upon the record as a whole and not against the clear weight of the evidence or induced by an erroneous view of the law, they cannot be upset. Lessmann v. Commissioner of Internal Revenue, 8 Cir., 327 F.2d 990, 993; Schoenberg v. Commissioner of Internal Revenue, 8 Cir., 302 F.2d 416, 419.

Deficiency assessments of the Commissioner are usually presumptively correct. Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212. The burden of proof, apart from fraud issues not here present, is on the taxpayer. Hamm v. Commissioner of Internal Revenue, 8 Cir., 325 F.2d 934, 937; Banks v. Commissioner of Internal Revenue, 8 Cir., 322 F.2d 530, 537. Such is also the rule in constructive dividend cases. Flomarcy Co. v. Commissioner of Internal Revenue, 2 Cir., 324 F.2d 730.

The presumption of correctness rule is usually dispositive of a case in situations where the taxpayer offers no substantial evidence to overcome the presumption created by the Commissioner's determination. However, when the taxpayer has offered substantial evidence to support his position, the presumption disappears. The fact issue must then be resolved by the Tax Court upon the basis of the evidence before it. If the taxpayer has demonstrated that the deficiency determination is erroneous, the taxpayer is not required to establish the correct amount of tax. In this situation, Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct. 287, 291, 79 L.Ed. 623, teaches:

"Unquestionably the burden of proof is on the taxpayer to show that the Commissioner\'s determination is invalid. Lucas v. Kansas City Structural Steel Co., 281 U.S. 264, 271 50 S.Ct. 263, 74 L.Ed. 848; Wickwire v. Reinecke, 275 U.S. 101, 105 48 S.Ct. 43, 72 L.Ed. 184; Welch v. Helvering, 290 U.S. 111, 115 54 S.Ct. 8, 78 L.Ed. 212. Frequently, if not quite generally, evidence adequate to overthrow the Commissioner\'s finding is also sufficient to show the correct amount, if any, that is due. See, e. g., Darcy v. Commissioner of Internal Revenue 66 F.2d 581, 585. But, where as in this case, the taxpayer\'s evidence shows the Commissioner\'s determination to be arbitrary and excessive, it may not reasonably be held that he is bound to pay a tax that confessedly he does not owe, unless his evidence was sufficient also to establish the correct amount that lawfully might be charged against him. On the facts shown by the taxpayer in this case, the Board should have held the apportionment arbitrary and the Commissioner\'s determination invalid."

See Poletti v. Commissioner of Internal Revenue, 8 Cir., 330 F.2d 818; Campbell County State Bank v. Commissioner of Internal Revenue, 8 Cir., 311 F.2d 374, 379.

The fact finder, here the Tax Court, is the exclusive judge of the credibility of the witnesses and the weight to be given to their testimony. Investors Diversified Services v. Commissioner of Internal Revenue, 8 Cir., 325 F.2d 341, 351-352.

I.

We now pass to the law relating to constructive dividends. Title 26 U.S.C.A. § 61(a) (7) defines gross income as including income from whatever source derived, including dividends. Title 26 U.S.C.A. § 316(a) defines dividends as including any distribution made by a corporation to its shareholder out of earnings or profits.⁴

A taxpayer who is a stockholder has been held to have received constructive dividends in many situations where he has received an economic benefit as a result of the payment made to him or for his benefit by the corporation. Examples are excessive salaries, Heil Beauty Supplies v. Commissioner of Internal Revenue, 8 Cir., 199 F.2d 193; diversion of corporate income to shareholder, Dawkins v. Commissioner of Internal Revenue, 8 Cir., 238 F.2d 174; Simon v. Commissioner of Internal Revenue, 8 Cir., 248 F.2d 869; corporate fulfillment of personal obligation of a shareholder, Sachs v. Commissioner of Internal Revenue, 8 Cir., 277 F.2d 879; payment of individual expenses of a shareholder, Greenspon v. Commissioner of Internal Revenue, 8 Cir., 229 F.2d 947; and personal use of corporate property by a shareholder, Challenge Mfg. Co. v. Commissioner of Internal Revenue, 37 T.C. 650.

The distribution need not be formally declared as a dividend by the corporation. The motive or expressed intent of the corporation is not determinative. Constructive dividends have been found contrary to the expressed intent of a corporation. Sachs v. Commissioner of Internal Revenue, supra; Simon v. Commissioner of Internal Revenue, supra. There is no requirement that the distribution be pro rata among the shareholders or that all shareholders participate in receiving a distribution. Simon v. Commissioner of Internal Revenue, supra; Lengsfield v. Commissioner of Internal Revenue, 5 Cir., 241 F.2d 508, 511.

The underlying basis of taxation of constructive dividends is found in the oft repeated statement reading: "The courts, as arbiters of the true nature of corporate payments, have consistently used as a standard the measure of receipt of economic benefit as...