Enterprise Railway Equipment Co. v. United States

• Decision Date: 07 May 1958
• Docket Number: No. 484-56.,484-56.
• Citation: 161 F. Supp. 590
• Parties: ENTERPRISE RAILWAY EQUIPMENT COMPANY v. UNITED STATES.
• Court: U.S. Claims Court

161 F. Supp. 590

ENTERPRISE RAILWAY EQUIPMENT COMPANY v. UNITED STATES.

No. 484-56.

United States Court of Claims.

May 7, 1958.

J. Gilmer Korner, for plaintiff. Middleton Miller, Edwin C. Austin, W. Stirling Maxwell, and Sidley, Austin, Burgess & Smith, Chicago, Ill., were on the briefs.

Elizabeth B. Davies, Washington, D. C., with whom was Asst. Atty. Gen. Charles K. Rice, for defendant, James P. Garland, Washington, D. C., was on the brief.

LITTLETON, Judge.

Plaintiff sues for refund of income taxes for the calendar years 1947, 1948, 1949 and 1950, together with interest as provided by law, on the ground that during those years plaintiff was entitled to exemption from taxes under the provisions of section 101(6) of the Revenue Code of 1939, 26 U.S.C.A. § 101(6), as a corporation operated exclusively for charitable and educational purposes, no part of the net earnings of which inured to the benefit of any private shareholder or individual.¹

Plaintiff is a corporation incorporated under the laws of Illinois. It carries on a railway equipment supply business for profit. On May 28, 1947, and thereafter, all of the outstanding shares of stock of the plaintiff were owned, and the entire proprietary interest in plaintiff was held, by the William H. Miner Foundation, hereinafter referred to as the "Foundation." The Foundation had been created under the terms of an irrevocable trust on December 29, 1923, for the charitable and educational purpose of providing adequate income and permanent endowment for three charitable and educational corporations: Chazy Central and Consolidated Rural School, Physicians Hospital of Plattsburg, and The William H. Miner Agricultural Research Institute. On October 19, 1950, the Commissioner of Internal Revenue ruled that the Foundation was organized and operated exclusively for charitable and educational purposes and was exempt from income tax under section 101(6) of the Internal Revenue Code of 1939.

Subsequent to May 28, 1947, the date on which the Foundation became the owner of plaintiff corporation, the trustees of the Foundation filled two of the plaintiff corporation's three directorships and also the offices of president, secretary and treasurer.

The plaintiff corporation filed income tax returns for the calendar years 1947, 1948, 1949 and 1950 and paid the income tax shown thereon to be due, including in such payments additional amounts with interest thereon assessed by the Collector after investigation and audit by the Bureau of Internal Revenue.

Plaintiff filed four timely claims for refund of all income taxes paid as stated above on the ground that at all times subsequent to May 28, 1947, the plaintiff corporation was exempt from tax under the provisions of section 101(6) of the Internal Revenue Code as a charitable organization. On November 18, 1954, the Commissioner of Internal Revenue disallowed in full plaintiff's claims for refund for the years ended December 31, 1947, 1948 and 1949, and on September 6, 1955, the Commissioner disallowed in full plaintiff's claim for refund of income tax for the year ended December 31, 1950. Thereafter, on November 10, 1956, plaintiff filed its petition in this court.

Defendant filed its answer on January 9, 1957, admitting some and denying other allegations in the petition. On March 18, 1957, the plaintiff filed the present motion for summary judgment placing primary reliance on the decision of this court in Dillingham Transportation Building, Ltd. v. United States, 146 F.Supp. 953, 137 Ct.Cl. 389. In that case the court held that for periods prior to 1951 a business corporation was "organized" (within the meaning of Section 101(6) of the Code) and operated for exempt charitable purposes if it was so controlled and managed that its earnings must be used for such purposes. Inasmuch as the Government did not file a petition for a writ of certiorari in the Dillingham, case, the defendant indicated to the plaintiff and the court that it was prepared to accept the court's ruling as applicable in the instant case, and on April 10, 1957, defendant filed a motion with the court seeking suspension of further proceedings for sixty days from April 17, 1957, in order to permit defendant to consider the making of an administrative refund of the taxes claimed by plaintiff. Defendant's motion was allowed on May 1, 1957.

On June 13, 1957, defendant moved the court to further suspend proceedings for an additional sixty days. In its supporting papers, defendant stated that it was still considering the making of an administrative refund to plaintiff and that in connection therewith it appeared necessary to obtain additional information from the Internal Revenue Service.

On June 14, 1957, plaintiff moved to vacate the May 1, 1957, order suspending proceedings, and in its motion plaintiff also asked the court to require the defendant to respond to plaintiff's March 18, 1957, motion for summary judgment. In support of its motion to vacate, plaintiff's attorney filed his affidavit stating that on June 6, 1957, the Assistant Attorney General for the Tax Division, Department of Justice, had written to plaintiff's counsel stating: (1) that as a result of defendant's study of the case it appeared that additional information was needed and that the Internal Revenue Service had been requested to make a further investigation for the purpose of obtaining such information; (2) that the report of the Internal Revenue Service had not yet been received, and (3) that as soon as that report was received, the Justice Department would give prompt attention to the matter of the administrative refund. The affidavit of the attorney for plaintiff then went on to state that subsequently an agent of the office of the District Director of Internal Revenue had visited plaintiff's attorney and had requested that an agent be allowed to interview plaintiff's officers. Plaintiff's attorney stated in the affidavit that after listening to the reasons advanced by the Internal Revenue agent for the requested interviews and the subject matter proposed to be covered in such interviews, plaintiff's attorney came to the conclusion that the true purpose of the requested interviews and investigation was not to proceed with the administrative refund but rather for the purpose of attempting to develop some new defense to plaintiff's claim in this court.

On June 24, 1957, defendant filed objections to plaintiff's motion to vacate the order of May 1, 1957, suspending further proceedings and to require defendant to respond to plaintiff's March 18, 1957, motion for summary judgment. In the memorandum supporting defendant's objections to plaintiff's motion to vacate, etc., defendant for the first time called attention to the fact that the affidavit supporting plaintiff's March 18 motion for summary judgment had stated that all of the net earnings of plaintiff corporation inured to the benefit of the Foundation and that no part of such earnings inured to the benefit of any private shareholder or individual, but that no other statements of facts to support that allegation appeared in plaintiff's petition or in accompanying documents. Defendant further stated that although it was willing to accept the ruling of the court in the Dillingham case, supra, a study of the administrative files of the Internal Revenue Service suggested to defendant that it might be doubtful whether all of the net earnings of plaintiff did in fact accrue to the Foundation and none to individuals. Defendant noted the fact that in plaintiff's income tax return for 1949, Mr. Withall, the president of plaintiff corporation, had received a salary of $59,812.38, that a contribution of $28,329.99 had been made to his credit in the employees' profit sharing trust, and that on plaintiff's return for that year is was indicated that Mr. Withall devoted only part time to this work as president of the corporation. Defendant further stated that plaintiff's income tax return indicated that substantial salaries were paid to other officers of the plaintiff "some of whom devoted only part of their time to its service." Defendant then stated that in view of the requirement of section 101(6) of the Code that no part of the net earnings of a corporation claiming the charitable exemption thereunder "inures to the benefit of any private shareholder or individual," defendant deemed it necessary to request the Internal Revenue Service to make a further investigation of the facts relative to the reasonableness of the salaries so paid. Defendant stated further that it had been advised by the Internal Revenue Service that plaintiff's attorney had refused to allow the Internal Revenue agent to interview the officers of plaintiff or to inspect its records and that plaintiff's attorney had filed a motion to vacate the May 1 suspension order of the court and to require defendant to answer plaintiff's March 18 motion for summary judgment. Defendant stated that because of the lack of necessary information it was impossible for it to prepare proper affidavits in opposition to plaintiff's motion for summary judgment and that in view of the attitude of plaintiff's counsel, defendant was requesting the court to deny plaintiff's motion to vacate the suspension order and to grant defendant's motion for a further sixty day suspension so that defendant might have additional opportunity to obtain the necessary information "by other methods" or to decide what further steps it should take in defense of plaintiff's suit.

Defendant's motion for the second sixty day suspension was granted and plaintiff's motion to vacate the previous suspension order and to require defendant to respond to plaintiff's motion for summary judgment, was denied on June 26, 1957.

On June 28, 1957, apparently not yet aware of the above action of the court on June 26, 1957, plaintiff filed a reply to defendant's memorandum of June 24, 1957. In its reply plaintiff stated that as a...