Dothan Coca-Cola Bottling Co. v. United States, Civ. A. No. 78-27-S
| Decision Date | 10 December 1982 |
| Docket Number | Civ. A. No. 78-27-S,78-172-N. |
| Citation | 561 F. Supp. 1261 |
| Parties | DOTHAN COCA-COLA BOTTLING COMPANY, INC., A Corporation, and Montgomery Coca-Cola Bottling Company, Inc., A Corporation, Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Middle District of Alabama |
M.R. Nachman, Jr., Steiner, Crum & Baker, Montgomery, Ala., for plaintiffs.
Jack D. Warren, Atty., Tax Div., Dept. of Justice, Washington, D.C., for defendant.
These causes are now submitted to the Court for final decision on the evidence specified in the Pretrial Order entered herein March 19, 1982.1 These causes were instituted by Plaintiffs for the recovery of income taxes and interest paid for the fiscal years ended September 30, 1965, through September 30, 1969. The cases present common questions of fact and law and were consolidated by Order of this Court on August 31, 1978.
The Commissioner of the Internal Revenue Service (IRS) assessed a deficiency of $190,626.64, plus interest, against the income tax liability of Plaintiffs for fiscal years ending September 30, 1965, 1966, 1967, 1968 and 1969. Said deficiencies, together with interest, were paid by the Plaintiffs on August 14, 1973. On July 30, 1975, Plaintiffs filed claims for refunds for each of the said fiscal years involved. These claims for refunds were based on the premise that the IRS Commissioner had erroneously classified Plaintiffs as personal holding companies, thus subjecting all of the Plaintiffs' income to the 70 percent penalty tax imposed on personal holding companies under 26 U.S.C. § 541 of the Internal Revenue Code. Plaintiffs contend that, because of one of three alternative reasons, they do not operate as personal holding companies and are not subject to the tax imposed by § 541 of the Internal Revenue Code. Defendant contends that Plaintiffs do operate as personal holding companies and, thus, are subject to the tax imposed by § 541 of the Internal Revenue Code.
It is stipulated by and between the parties that the following are all of the issues in controversy in these causes:
1. THE SETTLEMENT ISSUE. The first issue this Court must decide is whether the negotiations between the parties constituted a binding compromise and settlement of these causes. Plaintiffs contend that a settlement was reached when the "appropriate authorities" of the United States Government failed to disapprove or reject Plaintiffs' settlement proposal of June 22, 1981 — which was recommended by Defendant's counsel — within a "reasonable" time after its assurances of "prompt notification". Defendant contends that Plaintiffs' said offer of settlement was rejected by the appropriate authorities of the United States Government on December 1, 1981.
2. THE PER-GALLON-PAYMENT ISSUE. The second issue this Court must decide is whether any or all of the 20-cents-per-gallon consideration paid to Plaintiffs by certain partnerships related to said Plaintiffs constitutes compensation for the use of property, thereby relieving Plaintiffs of holding-company status, or whether said payment constitutes a royalty which would place Plaintiff-Taxpayers in the position of being holding companies.
3. THE JOINT VENTURE ISSUE. The third issue in controversy is whether Taxpayer-Corporations and the sub-bottler partnerships were engaged in a joint venture. Plaintiffs contend that they were engaged in a joint venture with the partnerships, and, thus, regardless of the classification of the 20-cents-per-gallon payment, there could be no personal holding company income since the entire amount paid by the partnerships to Plaintiff-Taxpayers should be regarded as Plaintiffs' share of the joint venture. Defendant contends that the relationship between Plaintiff-Taxpayers and the sub-bottler partnerships was not that of a joint venture.
4. THE VALUATION ISSUE. The fourth and final issue this Court must decide is what portion, if any, of the 20-cents-per-gallon payment is royalty payment and what portion is payment for the use of the real and personal property owned by Plaintiff-Taxpayer Corporations and used by the partnerships. This issue will be decided only if this Court finds that the per-gallon payment is composed of both rent and royalty.
Plaintiffs' counsel contends that he and Defendant's trial attorney, Hon. Jack Warren, (hereinafter collectively trial counsel), reached an understanding for the compromise and settlement of these actions. As grounds for said contention, Plaintiffs rely on a letter from Plaintiffs' counsel to Defendant's counsel dated June 12, 1981. In said letter, Plaintiffs' counsel states that it is his understanding that any action on the part of the government would be "prompt" and that he has assured the Court that this process will be completed within 90 days. On the same date, i.e., June 12, 1981, trial counsel filed a joint motion asking this Court to postpone the pretrial hearing scheduled for June 18, 1981. As grounds for said motion, trial counsel stated they had arrived at a settlement proposal between themselves which they had recommended to their respective clients. Apparently, Plaintiffs' counsel had already obtained the approval of his clients for the settlement proposal, thus making consummation of said settlement contingent upon Defendant's counsel's obtaining approval from the appropriate authorities of the United States Government. In further support of their position, Plaintiffs refer the Court to a letter from Assistant Attorney General Stephen Shapiro dated June 19, 1981, in which Shapiro stated "* * * that the settlement negotiations concluded by you and Mr. Warren will result in bringing the cases to a mutually satisfactory conclusion." However, further study of said letter reveals that, while Mr. Shapiro did express his hope that a settlement would be forthcoming, he unequivocally stated in the same letter that "* * * offers of settlement in tax cases are subject to independent review in the department and while the actions recommended thereon by our trial attorneys are given serious consideration, they are not controlling, the ultimate right to accept or reject being reserved as a function of independent review." Following the above-mentioned communications, there were several more correspondence between the parties concerning the settlement offer and the problems of delay. On October 26, 1981, this Court wrote Mr. Shapiro and expressed its concern over the length of the Defendant's delay in responding to said settlement offer. In addition, this Court advised Mr. Shapiro that the cases were being placed on a pretrial docket, and if said settlement was neither approved nor disapproved by that time, an attorney for the Defendant would be expected to attend said pretrial hearing, prepared to proceed toward the ultimate resolution of these cases.
While this Court is chagrined at the Defendant's inordinate delay in responding to the above-mentioned settlement offer, the Court also feels that Plaintiffs' reliance upon United States v. Armbruster, 446 F.Supp. 866 (S.D.N.Y.1977), as being dispositive of the settlement issue is misplaced. The facts upon which the Armbruster decision was rendered are readily distinguishable from the facts in the instant cases. For the sake of efficiency, this Court will not now attempt to undertake same. Suffice it to say, this Court is not persuaded by Armbruster that it should now bind these parties to the Plaintiffs' proposed offer of settlement. While it does appear that the Government has dragged its feet in these cases, it is the opinion of this Court that it should not and cannot force the Defendant to be bound under Plaintiffs' offer of settlement on the basis that Defendant failed to accept or reject said offer within a certain period of time prescribed by Plaintiffs. Therefore, the premises considered, this Court finds that the negotiations between the parties in these causes did not constitute a binding compromise and settlement.
The second issue this Court must decide is whether any or all of the 20-cents-per-gallon consideration paid to the Plaintiff-Taxpayer-Corporations by the sub-bottler partnerships constitutes compensation for the use of property or whether it constitutes a royalty, and, thus, whether Plaintiff-Taxpayers were or were not personal holding companies during the years in question. If the Court finds that none of the 20-cents-per-gallon payment is a royalty, the Plaintiffs are entitled to judgment, but if the Court finds that said payments include a charge for royalties, then the Court must determine what part of the payments is royalty and what part is rent and what part of the ordinary gross income, if any, of the Plaintiff-Taxpayer-Corporations is composed of royalties. If the Plaintiffs did not have personal holding company income — that is, if they did not receive royalties in excess of ten percent of their ordinary gross income — they are not subject to the penalty tax of 26 U.S.C. § 541 under which the IRS assessed the deficiencies which are the subject of these causes. Plaintiffs contend that the gallonage payments in issue were intended to be a partial rental payment for the use of tangible real and personal property owned by Plaintiffs and leased to two sub-bottler partnerships, and not a payment for the use by the partnerships of Plaintiffs' franchise. Defendant contends that the Plaintiffs and the two sub-bottler partnerships intended the 20-cents-per-gallon payment to be a payment by the sub-bottler partnerships for the use by said partnerships of Plaintiffs' franchise and, thus, was a royalty payment.
Since 1934 a special tax has been imposed on so-called "personal holding companies". In Fulman v. United States, 434 U.S. 528, 531, 98 S.Ct. 841, 844, 55 L.Ed.2d 1 (1978), the Supreme Court of the United States stated:
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