Egan, Inc. v. Commissioner of Internal Revenue
| Decision Date | 16 July 1956 |
| Docket Number | No. 15440.,15440. |
| Citation | 236 F.2d 343 |
| Parties | EGAN, Inc., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Joseph A. Maun, St. Paul, Minn. (William R. Busch, St. Paul, Minn., Douglas Thornsjo, Minneapolis, Minn., and Bundlie, Kelley & Maun, St. Paul, Minn., on the brief), for petitioner.
C. Guy Tadlock, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Acting Asst. Atty. Gen., and Lee A. Jackson and L. W. Post, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.
Before GARDNER, Chief Judge, and WOODROUGH and VAN OOSTERHOUT, Circuit Judges.
Egan, Inc., a taxpayer corporation, petitioner herein, seeks reversal of the decision of the Tax Court entered May 9, 1955, (unreported) upholding determination of the Commissioner that the corporation was availed of in 1948 for the purpose of preventing the imposition of surtax upon its sole stockholder, Henry G. Egan, through the medium of permitting earnings or profits to accumulate instead of being distributed, and sustaining surtax imposed under Section 102 of the Internal Revenue Code of 1939, 26 U.S.C.A. Sec. 102(a) and (c).1
The Commissioner's position was that the business carried on by the Petitioner had always consisted in selling Chevrolet cars and trucks under a sale franchise agreement with Chevrolet Motor Division of General Motors Corporation which was terminated on October 31, 1948, and petitioner received no more cars or trucks to sell and therefore had no business need for the large surplus of more than $750,000 it had accumulated from profits, but retained it for the purpose of preventing the imposition of surtax on its only stockholder, Mr. Egan.
The petitioner's claims were presented in its petition to the Tax Court for redetermination of deficiency as follows:
In its Findings of Fact and Opinion the Tax Court presents a complete summary of the matters stipulated by the parties and of the evidence contained in some 200 pages of narrative and the grounds upon which its decision was rendered in favor of the Commissioner ordering deficiencies. The Tax Court found that "petitioner was availed of during 1948 for the purpose of preventing the imposition of the surtax upon its sole shareholder, Egan, through the medium of permitting earnings to accumulate instead of being divided or distributed." It stated in its Opinion that
The Tax Court also said that, although Mr. Egan made attempts to regain a Chevrolet franchise, he did so without any real expectation of success. Before the close of 1948 he agreed with representatives of Chevrolet Motor Division to discuss the sale of the taxpayer's agency, realty and equipment to a successor to the franchise and effectuated such sale early in March 1949. He caused the company's charter to be amended on December 30, 1948, deleting "Chevrolet" from its name as it was obligated to do when it ceased to receive or sell Chevrolet cars on termination of the franchise, and authorizing it to transact real estate business instead. The court further stated that "during the closing months of 1948 Egan was but exploring the possibilities of petitioner's continuance in some sort of business but had no real present intention that it should do so." It declared further that taxpayer failed to show any concrete basis for a finding that at December 31, 1948, it had business prospects other than winding up the car selling business it had been conducting. Mr. Egan came to his death in 1953 and in that year the taxpayer was liquidated and its assets were turned over to the executor of Mr. Egan's estate. It had never applied its accumulated surplus to any business needs.
On this review the petitioner does not question that the effect of retaining its large surplus accumulated in 1948 and prior years without distributing it was to save Mr. Egan from large surtax nor that the surplus was never used by it for any business needs. But it contends that findings should have been made in accord with the allegations of its petition for redetermination of deficiency above set forth and the surtax should have been set aside.
It is well settled that the issue raised was a question of fact to be determined by the Tax Court. Helvering v. National Grocery Company, 304 U.S. 282, 58 S.Ct. 932, 82 L.Ed. 1346; Bride v. Commissioner, 8 Cir., 224 F.2d 39, certiorari denied, 350 U.S. 883, 76 S.Ct. 136, and whether there was substantial evidence to support the ultimate findings can best be shown by setting forth a summary of the Findings of Fact of the Tax Court as follows:
Taxpayer is a Minnesota corporation and during the years here involved maintained its principal office at 222 North Concord Street, South St. Paul, Minnesota. It kept its books and filed its income tax returns on the basis of a calendar year and upon the accrual method of accounting.
Egan, Inc. is the present name of taxpayer. As incorporated, its name was Egan Chevrolet, Inc., the change having been effected by amendment to its charter on December 31, 1948. Taxpayer was incorporated December 14, 1932, with an authorized capital stock of $50,000 represented by 500 shares of par value stock at $100 per share. Only 100 shares of such stock were issued and were held as follows:
Number of Shares Held on
December 14, December 31
1932 1948
Henry G. Egan President and
General Manager 98 100
Alice M. Egan
(Wife of Henry
G. Egan) Secretary-Treasurer 1 0
Alois J. Pieper Vice-President (1932)
Secretary (1948) 1 0
___ ___
Total 100 100
Henry G. Egan, hereinafter referred to as Egan, died on January 15, 1953. Before his death, and by the close of 1948, he had acquired all of the outstanding stock of taxpayer. In 1927 he personally obtained an exclusive franchise from the Chevrolet Division of General Motors Corporation to sell Chevrolet automobiles and trucks in the city of South St. Paul, Minnesota. The term of the franchise was one year from November 1, 1927, to October 31 of the ensuing year, at which date termination occurred without the necessity of any act of termination on the part of either contracting party. However, the franchise was renewed each year until October 31, 1948, when it was finally terminated by the refusal of General Motors to renew the same.
On January 3, 1933, Egan conveyed his interest in the franchise agreement to taxpayer in exchange for 100 shares of fully paid capital stock of that corporation. In the same transaction Egan also conveyed to taxpayer his Chevrolet agency in South St. Paul. At that date the board of directors of the corporation fixed the fair market value of the franchise and the agency property at $26,680. Taxpayer subsequently conducted the Chevrolet sales agency under annual renewals of the franchise without interruption until October 31, 1948.
Among other requirements, the franchise imposed upon taxpayer the duty to maintain a new car sales agency, including a service station, parts and accessories and used car facilities, all of which were required to be conducted and maintained in a manner satisfactory to General Motors. Taxpayer might not change its business location without General Motors' consent. At the termination of the franchise, taxpayer was bound by its terms to discontinue the use of the word "Chevrolet" in its name.
Prior to 1941 taxpayer purchased new cars from the manufacturer for retail sale from its cash. It always had outstanding liability on note indebtedness, the highest being $305,895.78 in 1942. At the close of 1948 the amount for which it was liable on sales contracts was $81,800.
A substantial portion of sales were upon the installment basis. Such sales were evidenced by contracts which were in nearly all instances subsequent to 1946 assigned to either General Motors Acceptance Corporation, hereinafter referred to as G.M.A.C., or the Stockyards National Bank of South...
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