CWT Farms, Inc. v. Comm'r of Internal Revenue
| Decision Date | 19 July 1982 |
| Docket Number | 16367-80.,Docket Nos. 16365-80 |
| Citation | 79 T.C. 86 |
| Parties | * CWT FARMS, INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTCWT INTERNATIONAL, INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
F owned all the stock of I, which elected to be treated as a DISC. During the years in issue, I made loans to F, and such loans were evidenced by demand notes. On its books, I described such loans as “producer's loans.” Held, such loans did not qualify as producer's loans under sec. 993(d)(1)(B), I.R.C. 1954, since they were evidenced by demand notes, and accordingly, I did not qualify as a DISC since 95 percent of its assets were not qualified export assets. Held, further, a dividends received deduction is not allowed for the accumulated DISC income of I deemed distributed as a dividend to F upon I's disqualification as a DISC. Secs. 1.246-4 and 1.995-1(a)(5), Income Tax Regs., are valid. W. Woodrow Stewart, T. Treadwell Syfan, and Steven A. Cornelison, for the petitioners.
Bettie N. Ricca, for the respondent.
The Commissioner determined the following deficiencies in the petitioners' Federal income taxes:
The ultimate issue for decision is whether CWT International, Inc. (International), qualified as a domestic international sales corporation (DISC) for its taxable years ending in 1975, 1976, and 1977. Here, we resolve that issue by deciding whether certain loans made by International to its parent corporation, CWT Farms, Inc. (Farms), and evidenced by demand notes constituted producer's loans within the meaning of section 993(d)(1)(B), I.R.C. 1954. 1 If International did not qualify as a DISC for any of such years, we must also decide whether Farms is entitled to the dividends received deduction of section 243 for the accumulated DISC income of International deemed distributed to Farms under section 995(b)(2).
Some of the facts have been stipulated, and those facts are so found.
The petitioners, Farms and International, were both Georgia corporations with their principal places of business in Gainesville, Ga., at the time they filed their petitions in this case. International was organized on September 7, 1972. At such time, and during the years in issue, it had only one class of stock, which had an aggregate par value of $2,500 on each day of such years. Farms was the sole shareholder of such stock. On September 7, 1972, International timely and properly filed its election to be treated as a DISC, and the election was consented to by Farms. Both Farms and International use a taxable year ending September 30, and we shall identify the taxable year of each such corporation by the calendar year in which it ends. International and Farms filed Federal corporate income tax returns for their taxable years 1975, 1976, and 1977 with the Internal Revenue Service Center, Chamblee, Ga.
During the period September 30, 1974, through September 19, 1976, Farms was a wholly owned subsidiary of Twin Oaks Hatchery, Inc. (Twin Oaks). During the period September 20, 1976, through September 30, 1977, the stock ownership of Farms was as follows:
+-----------------------------------+
¦Shareholder ¦Number of shares ¦
+----------------+------------------¦
¦Twin Oaks ¦40 ¦
+----------------+------------------¦
¦Raymond H. Burch¦10 1/2 ¦
+----------------+------------------¦
¦Joseph C. White ¦5 ¦
+-----------------------------------+
During the years in issue, Helen Feed Store, Inc. (Helen Feed), was a wholly owned subsidiary of Twin Oaks.
During the years in issue, Farms was engaged in the domestic production of poultry products and in the domestic sale and foreign export of such products. International was a “paper corporation.” Its sole function was to act, pursuant to a sales franchise agreement, as commission agent for items exported by Farms. During the years in issue, the officers of both such corporations were the same.
During the years in issue, both Farms and International kept their books and records under the accrual method of accounting. Thus, the commissions due to International became fixed as of the end of the taxable year of each corporation. However, Farms did not receive from its accountant the information from which it could determine the amount of such commissions until approximately 1 week prior to the time for filing the Federal corporate income tax returns for Farms and International. During the years in issue, International received the following commissions from Farms:
+-------------------------------+
¦Year ¦Amount ¦Date paid ¦
+-------+-----------+-----------¦
¦9/30/75¦$157,538.33¦12/15/75 ¦
+-------+-----------+-----------¦
¦9/30/76¦145,440.77 ¦12/ 8/76 ¦
+-------+-----------+-----------¦
¦9/30/77¦116,142.53 ¦12/20/77 ¦
+-------------------------------+
International made the following loans to Farms: On December 15, 1974, $66,873.22; on December 15, 1975, $79,134.16; and on December 15, 1976, $72,000. Each of such loans was evidenced by a demand promissory note. None of such notes stated on its face that it was a producer's loan within the meaning of section 993(d)(1), nor was there any language on the face of such note stating that the loan was a producer's loan. However, the books and records of International showed each of such loans under an account labeled “Producers Loans.” Also, the amounts of such loans were reflected on Schedule L of Form 1120-DISC filed by International for each of the taxable years in which such loans were made.
The note of December 15, 1974, was renewed on December 1, 1979, with a fixed and stated maturity date of December 1, 1984. The note of December 15, 1975, was renewed on December 1, 1980, with a fixed and stated maturity date of December 1, 1985. The note of December 15, 1976, was renewed on September 1, 1981, with a fixed and stated maturity date of August 31, 1986. The renewal notes of December 1, 1979, and September 1, 1981, stated on their face that they were producer's loans.
In determining the amounts that International could loan to Farms as producer's loans, Farms aggregated its export-related assets with the export-related assets of Helen Feed and Twin Oaks.2 In 1976, Twin Oaks spent $98,377.44 in connection with its ISA Vedette flocks and treated such expenditure as a research and experimental expenditure within the meaning of section 174. Farms did not file written statements to aggregate the export-related assets of its controlled group with International's Federal income tax returns for the taxable years 1975, 1976, and 1977. However, in November 1978, such statements were submitted to the revenue agent examining the returns of the corporation. Prior to submitting such statements, Farms was unaware that the regulations under section 993(d) required such a written election to aggregate the export-related assets of its controlled group.
In his notice of deficiency to International, the Commissioner determined that it did not qualify as a DISC for its taxable years 1975, 1976, and 1977, and that the full amount of its income was taxable for those years. In his notice of deficiency to Farms, the Commissioner determined that as a result of the disqualification of International for its taxable years ending after 1974, International's accumulated DISC income (as described in section 995(b)(2)(A)), as of September 30, 1974, was taxable to Farms for each of its taxable years 1976 and 1977. Also, the Commissioner disallowed certain country club dues paid by Farms.
OPINIONIn connection with the enactment of the DISC legislation, Congress explained the reasons for such legislation:
your committee believes that it is important to provide tax incentives for U.S. firms to increase their exports. This is important not only because of its stimulative effect but also to remove a present disadvantage of U.S. companies engaged in export activities through domestic corporations. Presently, they are treated less favorably than those which manufacture abroad through the use of foreign subsidiary corporations. United States corporations engaging in export activities are taxed currently on their foreign earnings at the full U.S. corporate income tax rate regardless of whether these earnings are kept abroad or repatriated. In contrast, U.S. corporations which produce and sell abroad through foreign subsidiaries generally can postpone payment of U.S. tax on these foreign earnings so long as they are kept abroad. [H. Rept. 92-533 (1971), 1972-1 C.B. 498, 529.]
In general, a corporation which qualifies as a DISC is not taxable on its profits. However, the shareholders are taxable currently on a portion of such profits, and they may defer taxation on the remaining portion of the profits until the profits are actually withdrawn from the DISC or until the corporation ceases to qualify as a DISC. The first issue for decision is whether International qualified as a DISC for its taxable years 1975, 1976, and 1977. 3
One of the requirements for qualification as a DISC is that at least 95 percent of the assets of the corporation at the close of its taxable year must be “qualified export assets.” Sec. 992(a)(1)(B). Such test is designed to ensure that substantially all of the DISC's assets are devoted to exporting. H. Rept. 92-533, supra, 1972-1 C.B. at 529. A DISC may operate on the basis of receiving commissions for the sales of products produced in the United States, usually by its parent, and the commissions due to the DISC for such sales may constitute qualified...
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