Cumberland Public Service Co. v. United States, 46963.

• Decision Date: 02 May 1949
• Docket Number: No. 46963.,46963.
• Citation: 83 F. Supp. 843
• Parties: CUMBERLAND PUBLIC SERVICE CO. v. UNITED STATES.
• Court: U.S. Claims Court

83 F. Supp. 843

CUMBERLAND PUBLIC SERVICE CO. v. UNITED STATES.

No. 46963.

United States Court of Claims.

May 2, 1949.

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Cornelius W. Grafton, of Louisville, Ky. (Henry H. Mathis, and Wyatt, Grafton & Grafton, all of Louisville, Ky., on the brief), for plaintiff.

J. H. Sheppard, of Washington, D. C., and Theron Lamar Caudle, Asst. Atty. Gen. (Robert N. Anderson and Andrew D. Sharpe, both of Washington, D. C., on the brief), for defendant.

Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and HOWELL, Judges.

WHITAKER, Judge.

W. L. McComas and E. S. Mayes and their families owned all of the stock of the Cumberland Public Service Company, an electric light company, located in Kentucky. On June 10, 1940, McComas and Mayes entered into an agreement with the Tri-County Electric Membership Corporation to sell to it certain of the physical properties of the plaintiff company, the Cumberland Public Service Company, as soon as this company was liquidated and the properties were received by them as a liquidating dividend. The sale was later consummated.

Subsequently the plaintiff company filed its income tax return for 1940 reporting a loss on the year's operation and no tax liability. It disclosed the sale of some of its properties to the Tri-County Electric Membership Corporation, but stated that this sale had been made by the stockholders, and not by the corporation. On an audit of this return the Commissioner of Internal Revenue determined that the property had been sold by the corporation, at a profit, and a tax on this profit was assessed against the corporation.

The return of the plaintiff company also claimed a loss on the sale of certain real estate of the company to one of the stockholders and a loss on the sale of machinery and equipment to another stockholder. These claimed losses were disallowed by the Commissioner. A total deficiency in tax and interest of $19,698.18 was assessed against the company. This deficiency was paid and a claim for refund was duly filed. Upon its disallowance this suit was brought.

The first issue presented is whether or not the assets sold to Tri-County Electric Membership Corporation were sold by the corporation or whether the sale was made by the stockholders.

It is clear from the testimony that from the beginning of negotiations for the purchase of the plaintiff company's assets the stockholders of the plaintiff were desirous of selling their stock in the plaintiff company, instead of causing the plaintiff company to sell the physical properties desired by Tri-County Electric Membership Corporation (referred to hereafter as Tri-County). Tri-County, however, did not desire all of the assets of the plaintiff company, and the stockholders thereupon agreed to reduce the price asked for their stock from $156,000 to $115,000, with the understanding that plaintiff company in the meantime should dispose of the assets which Tri-County did not want.

The original conference between representatives of Tri-County and the stockholders of the plaintiff company was at Murfreesboro, Tennessee, on February 16, 1940. There was present at this meeting a representative of the Rural Electrification Administration, hereinafter referred to as REA, which Administration was considering advancing to Tri-County the money for the purchase of these properties. This representative expressed doubt as to whether or not the REA could lawfully advance money to Tri-County for the purchase of the stock of the plaintiff corporation, but no final determination of this question was had until May 15, 1940, at a conference in Washington between the representatives of the REA and an attorney who represented both the stockholders of the plaintiff company and the plaintiff company itself. At this meeting this attorney was definitely advised that the REA could not advance money for the purchase of the stock of the plaintiff company.

The REA then advised this attorney that it was willing to advance to Tri-County the sum of $104,000 for the purchase of the physical properties desired. This attorney communicated this offer to the stockholders of the plaintiff company, who then directed the attorney to write the REA in part as follows: "Upon my return from Washington I reported our conversation to Messrs. McComas and Mayes, who felt that prior to making a commitment they should seek to ascertain what the taxes would run. We immediately employed a certified public accountant who is at Burkesville today getting certain information from the books and we are exploring two or three methods of handling the matter with possible taxes involved in each method. It will probably be the end of the week before we are able to say with any degree of assurance what the taxes will be, and until that time I am afraid my clients will be unable to make up their minds."

This accountant made computations of what the taxes would be if the corporation should sell the physical properties to Tri-County; what they would be if the stockholders sold their stock; and what they would be if the corporation dissolved and distributed its assets to the stockholders and then the stockholders made the sale of the desired properties to Tri-County. After these computations had been made it was determined that the least tax liability would be incurred by dissolving the corporation, distributing the assets to the stockholders, and letting the stockholders make the sale of the desired properties.

Thereupon, the stockholders of the plaintiff company determined to accept the offer and entered into a contract with Tri-County, agreeing to transfer to it certain properties upon receipt of them through liquidation of the plaintiff company. Later, the company was liquidated, its assets were distributed to its stockholders, and the stockholders made the sale to Tri-County of the properties desired.

It is evident that the transaction was handled in the way it was handled for the purpose of incurring the least tax liability. The purpose of the stockholders in the beginning, in undertaking to sell their stock in the plaintiff company rather than to cause this company to sell the physical assets, was to reduce tax liability as much as possible, and this purpose continued throughout the negotiations and determined the way the transaction was finally handled. There was never at any time an intention on the part of the plaintiff company or of its stockholders to cause this company to make the sale of its physical properties, because it was thought from the beginning that this would result in the greatest tax liability.

Under such facts we do not think it is tenable to say that, although the sale in form was made by the stockholders, it was in fact made by the corporation.

Although the avowed purpose of the stockholders of the plaintiff company was to reduce taxes, nevertheless, every step they took in the matter was entirely legal; there is not a suspicion of fraud or evasion involved; it was an open and above-board effort to carry out the transaction in the way that would result in the least taxes. This they had the undoubted right to do.

In Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 267, 79 L.Ed. 596, 97 A.L.R. 1355, the Supreme Court said: "The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted."

The court cited as authority for this statement United States v. Isham, 17 Wall. 496, 506, 21 L.Ed. 728; Superior Oil Co. v. State of Mississippi, 280 U.S. 390, 395-396, 50 S.Ct. 169, 74 L.Ed. 504; and...