Community TV Association of Havre v. United States

• Citation: 203 F. Supp. 270
• Decision Date: 28 February 1962
• Docket Number: Civ. No. 2156.
• Parties: COMMUNITY T. V. ASSOCIATION OF HAVRE, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Montana

203 F. Supp. 270

COMMUNITY T. V. ASSOCIATION OF HAVRE, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. 2156.

United States District Court D. Montana, Havre-Glasgow Division.

February 28, 1962.

J. Chan Ettien, Havre, Mont., and Hugh D. Galusha, Jr., Peter Meloy and Robert C. Johnson, Helena, Mont., for plaintiff.

Burton A. Schwalb, Washington, D. C., Moody Brickett, U. S. Atty., Butte, Mont., and Clifford E. Schleusner, Asst. U. S. Atty., Billings, Mont., for defendant.

JAMESON, District Judge.

This is a suit for refund of income taxes paid by plaintiff corporation, Community T. V. Association of Havre. The sole issue is whether payments received by the plaintiff in 1955 ($34,737.88) and 1956 ($10,298.03) from "Class B" stockholders in return for the issuance of "Class B" stock, constituted ordinary taxable income under Section 61(a)¹ of the Internal Revenue Code of 1954 or nontaxable payments of capital under either section 118(a)² or section 1032(a)³ of the 1954 Code. Most of the facts were stipulated, and essentially there is no factual dispute.

Plaintiff is a Montana corporation organized for the purpose of providing television signals to the residents of Havre, Montana, through a television cable system. The articles of incorporation authorized the issuance of 1000 shares of "common stock" of the par value of $100 each, of which 500 shares were "designated" as Class A stock, and 500 shares as Class B stock.

In order to receive television signals from the plaintiff, a customer was required to execute a "Connection and Service Agreement". Under this agreement each subscriber was required to pay a connection and service charge; and in addition he was required to pay $100 in cash, for which he would receive a certificate for one share of "Class B stock". The price of the stock could be paid either in one lump sum or in installments. The subscriber had the option, however, to get the service for a period of six months on a rental plan through payment of a prescribed rental charge. At the end of the six month period he could purchase one share of Class B stock for $100 and receive credit upon the purchase price of the difference between the six month rental charge and the lower regular monthly service charge he would have paid as "a Class B stockholder".

A failure by the subscriber to pay any of the rates and charges or any other violation of the agreement would give plaintiff the right to terminate the agreement and discontinue the service. In such case the subscriber would have no claim against the plaintiff and would, presumably, forfeit all moneys paid in. Either the subscriber or the plaintiff could terminate the agreement on 30 days' written notice. This right was a subscriber's exclusive remedy if dissatisfied with the service, and upon termination by the subscriber the plaintiff had no other or further liability to him. A subscriber could not assign, sublet or transfer his rights under the agreement without the prior written consent of the plaintiff.

Under the articles of incorporation Class A stock has sole voting and dividend privileges, and prior rights on liquidation. Class B stock enjoys none of these privileges and is subject to redemption at any time.⁴ The limitations of the Class B stock set forth in the stock certificate read: "This Class B stock does not entitle the owner thereof to vote nor participate in the profits of the corporation nor receive any dividends nor to share in the assets of the corporation on liquidation until after all Class A Stock is paid in full. This stock is subject to redemption at par at any time, and is subject to such other restrictions and limitations as the Board of Directors shall, by majority vote, from time to time prescribe."

Either the Class A stockholders or board of directors may amend the bylaws. At all times material to this controversy, 190 shares of Class A stock had been issued, thereby creating a capital account of $19,000 attributable to Class A stock. Some 440 shares of Class B stock had been issued.

Certificates for Class B stock were delivered to the subscribers in most cases. In some instances, however, the corporation held undelivered certificates because the owners had not called for them or to sign receipts for them.

The proceeds from the sale of Class B stock were segregated and carried on the books of the corporation as investment capital. However, the annual reports of the corporation to the State of Montana, filed from 1955 to 1961, do not include the Class B stock as part of the capital of the corporation. Plaintiff's accountant testified that the omissions were mistakes or oversights, but admitted that the purpose of such reports is to inform the public of the ownership and capital of the corporation.

One share of Class B stock was redeemed at par by the corporation and held on its books as treasury stock. The books of the corporation also show five transfers of Class B stock certificates. New certificates were issued to each of the transferees.

Under the by-laws the president or a majority of the board of directors may call a meeting of the holders of Class B stock, but any action taken by the Class B stockholders "shall be for advisory purposes only and shall not be binding upon the officers, directors, property or affairs of the corporation". The Class B stockholders were called together for one meeting in November, 1956, for the purpose of getting their approval of a resolution to drop the requirement that a new subscriber purchase one share of the Class B stock. Approval was given (although not necessary to corporate action under the articles of incorporation and by-laws) and thereafter sales of Class B stock were discontinued. Those who were buying Class B stock in installments and had not yet paid the full purchase price, were reimbursed by credits toward future service charges. Those subscribers who had paid the full price of $100 retained their stock.

The president of the corporation estimated the current value of the corporate assets at $250,000. The company's accountant testified that the liabilities as of December 31, 1960, were about $38,000 and would be less on December 31, 1961.

Under these facts, did the receipts from "Class B stock" constitute (1) a contribution to capital under section 118(a) (footnote 2); or (2) money received in exchange for stock within the meaning of section 1032(a) (footnote 3)?

It seems clear that the receipts from Class B stock are not "contributions to capital" exempted by section 118(a). Payments made to a corporation in consideration of services rendered or to be rendered or in consideration of direct benefits to be received from the corporation constitute taxable income. See Teleservice Co. of Wyoming Valley v. Commissioner of Internal Revenue, 3 Cir. 1958, 254 F.2d 105, cert. denied 357 U.S. 919, 78 S.Ct. 1360, 2 L.Ed.2d 1364; United Grocers, Ltd. v. United States, N.D. Calif.1960, 186 F.Supp. 724; Warren Television Corp. v. Commissioner, 1958, 17 T.C.M. 1053.⁵

Insofar as section 118(a) is concerned, this case is not distinguishable from Teleservice Co. of Wyoming Valley v. Commissioner of Internal Revenue, supra. Teleservice Company operated a community television service supplying a signal to persons in poor reception areas. To finance the construction necessary to build the system, contributions were solicited from subscribers. They were advised that the contributions were in aid of construction and had no bearing on the television service which would be charged monthly as an extra item. As in the instant case, a contributor could not sell, assign, or transfer his eligibility to receive signals. Under their contracts, the subscribers were not entitled to a refund of any part of their contribution save a partial payment in one instance — if the taxpayer terminated the service for its own convenience. The court held that the contributions were not within the provisions of section 118(a) and section 362⁶ of the 1954 Code, since in substance they were payments for a service and were not made solely to benefit the general community without expectation of services or direct benefits as is contemplated by those sections.⁷ Cf., Brown Shoe Co. v. Commissioner, supra.

Warren Television Corp. v. Commissioner of Internal Revenue, supra, was a similar case. In Warren the taxpayer was again a corporation engaged in a community television business substantially the same as that conducted by the Havre Community T. V. Association. Being unable to finance the original installation, the taxpayer's officers and employees solicited "capital contributions" from those desiring to "hook on" to taxpayer's television cable service. Residential subscribers paid $125 and commercial establishments $150. In return subscribers received "Capital Contribution Certificates". Only contributors were allowed to connect to the cable. During each of the years material to that case, the taxpayer repurchased some of the certificates, seven the first year at an average price of $65.70; 26 the second year at an average price of $97.00; and 66 the third year at an average price of $99.53. Again the initial contribution did not alone entitle a subscriber to the service; a monthly maintenance and rental fee was charged. The Tax Court found the Warren case "indistinguishable in principle" from Teleservice Co. of Wyoming Valley v. Commissioner of Internal Revenue, and held that the "contributions" were not exempt from income as contributions to capital under sections 118 (a) and 362.

The chief factual difference between the instant case and Warren Television Corp. v. Commissioner of Internal Revenue, is pointed up by the language of the Tax Court:

"A holder of a `Capital Contribution Certificate' issued by petitioner had none of the rights and privileges accorded under the laws of the State of Delaware to holders of shares of capital stock of a corporation incorporated under the laws of such State.

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