Estate of Goodall v. CIR
| Decision Date | 05 March 1968 |
| Docket Number | No. 18631-18636.,18631-18636. |
| Citation | 391 F.2d 775 |
| Parties | ESTATE of Robert A. GOODALL, Deceased, C. M. Goodall, Executrix, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ESTATE of Robert A. GOODALL, Deceased, Clarice M. Goodall, Executrix, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent (two cases). ESTATE of Robert A. GOODALL, Deceased, Clarice M. Goodall, Executrix, and Clarice M. Goodall, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. C. M. GOODALL, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. GOOD-ALL ELECTRIC MFG. CO., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Eighth Circuit |
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James W. R. Brown, Omaha, Neb., for petitioner; James J. Fitzgerald, Jr., Omaha, Neb., on brief and reply brief.
Louis M. Kauder, Atty., Dept. of Justice, Washington, D. C., for respondent; Mitchell Rogovin, Asst. Atty. Gen., Dept. of Justice, Washington, D. C., and attorneys Lee A. Jackson, Crombie J. D. Garrett, Grant W. Wiprud, Thomas L. Stapleton and Robert J. Campbell, Washington, D. C., on the brief.
Before VOGEL, Senior Circuit Judge, and BLACKMUN and HEANEY, Circuit Judges.
Robert A. Goodall died October 22, 1953.
The Commissioner of Internal Revenue, by his several 90-day letters, proposed deficiencies and additions1 to tax as follows:
Estate of Robert A. Goodall, deceased Federal estate tax
(Our No. 18,631; Tax Court No. 72,361)
Estate of Robert A. Goodall, deceased Income tax for the calendar
(Our No. 18,632; Tax Court No. year 1953; addition under
95,387) § 291(a) of the 1939 Code
Estate of Robert A. Goodall, deceased Income tax for the calendar
(Our No. 18,634; Tax Court No. 3142-63) year 1954; addition under
§ 6651(a) of the 1954 Code
Mr. and Mrs. Goodall (Our No. 18,633; Joint income tax for the
Tax Court No. 95,388) calendar years 1950/53, inclusive
§ 293(a) addition
for each of the 4 years
§ 294(d) (1) (B) addition
for 1951; § 294(d) (2) addition
for 1950/52, inclusive.
Mrs. Goodall (Our No. 18,635; Tax Income tax for the calendar
Court No. 3143-63) years 1954/59, inclusive;
§ 294(d)(1)(A) addition
for 1954.
Good-All Electric Mfg. Co. (Our No. Corporation income tax for
18,636; Tax Court No. 95,458) the fiscal years ended May
31, 1950/54, inclusive; §
102 surtax for all 5 years.
The deficiencies so proposed exceeded, in the aggregate, $6,300,000, and the additions totalled more than $545,000. By amended answer filed in the estate tax case, the Commissioner proposed a further deficiency of $281,388.03. Thus, more than $7,125,000 in tax deficiencies and additions, plus interest, were asserted. Except for about $195,000 of the corporation's tax, almost all of this large amount was disputed.
The Tax Court consolidated the several cases for hearing. Its detailed findings and opinion (Judge Mulroney) filed June 4, 1965 (not reviewed by the full court), T.C. Memo 1965-154, 24 T.C.M. 807, and its subsequent computational decisions under its Rule 50, filed July 26, 1966, redetermined deficiencies in the substantially reduced total net amount2 of $2,214,677.63, and additions aggregating $146,489.65. The respective taxpayers petition for review of certain aspects of these redeterminations. Our jurisdiction is established.
The facts, as found by the Tax Court, are based on stipulations, oral testimony, a deposition, and many exhibits, some jointly stipulated or jointly introduced. The factual material is, of course, intricate and complex. We mention initially only a few background facts. Others are referred to as we consider the respective issues.
The decedent, Robert A. Goodall, and his wife, Clarice M. Goodall, were equal business partners under an agreement executed by them on December 10, 1916, shortly after their marriage. This partnership continued from that date until Mr. Goodall's death on October 22, 1953. Prior to May 28, 1949, the partnership operated an electronics business in Ogallala, Nebraska. It manufactured and sold capacitors, rectifiers, soldering machines, watch cleaning machines, and fishing reels. The capacitors were for proximity fuses for the United States Navy; the partnership had been approved by the Department of the Navy as an authorized supplier.
In 1940 the Goodalls organized a Nebraska corporation under the name of Ogallala Industries, Inc. It was inactive, however, and its charter lapsed in 1944. The Goodalls revived the corporation in 1947. In April 1949 its name was changed to Good-All Electric Mfg. Co. This is the taxpayer in our No. 18,636. It is hereinafter referred to as the corporation.
On May 28, 1949, the partnership and the corporation executed a Manufacturing and Rental Agreement under which the corporation on June 1 took over the manufacturing business theretofore conducted by the partnership.
The issues before us are:
I. The existence of Tax Court jurisdiction in the face of the taxpayers' claim that the Commissioner failed to make the statutorily required determinations of deficiencies. This issue arises in all six cases.
II. The sufficiency of the evidence to support the Tax Court's finding that the partnership's interests in certain oil leases had a value of $2,400,000 at the decedent's death. This issue arises in the estate tax case.
III. The informational sufficiency of that finding.
IV. The sufficiency of the evidence to support the Tax Court's finding that the partnership, at the decedent's death, possessed a $940,000 asset consisting of "Intangibles — goodwill". This also arises in the estate tax case.
V. The sufficiency of the evidence to support the Tax Court's finding that the corporation, in each of its fiscal years 1950/54, inclusive, permitted its earnings and profits to accumulate beyond the reasonable needs of its business, within the meaning of § 102(c) of the 1939 Code.
VI. The sufficiency of the evidence to support the Tax Court's finding that in those years the corporation was availed of for the purpose of preventing the imposition of surtax upon its shareholders, within the meaning of § 102(a).
VII. The propriety of the Tax Court's not taking certain taxes and withdrawals into account in its compilation of the § 102 surtax.
VIII. The expensing of the partnership's intangible drilling and development costs. This issue arises in the Goodalls' income tax case, in the estate's two income tax cases, and in Mrs. Goodall's income tax case for 1954.
IX. The deductibility of certain legal fees and expenses incurred by the partnership. This arises in the Goodalls' income tax case for 1952.
X. The treatment of 1953 partnership income in the computation of the estate's basis in its partnership interest. This arises in Mrs. Goodall's income tax case.
XI. The measure of the 5% addition to tax under § 293(a) of the 1939 Code. This arises in the Goodalls' income tax case for 1951 and 1953.
We consider these issues in the order listed. Before we do so, however, we think it well to list certain matters which are not at issue on these petitions for review:
1. Not at issue is the legal efficacy of the 1916 partnership agreement between Mr. and Mrs. Goodall. This is therefore to be accepted as a genuine and fully effective business arrangement between the spouses.
2. Not at issue in the estate tax case is the elimination of an increase of $123,208.35, effected by the Commissioner, in the value of the decedent's partnership interest to reflect the difference in amounts withdrawn respectively by Mr. and Mrs. Goodall from the corporation and treated by them as partnership income. The Tax Court sustained the Commissioner in this increase. However, with the efficacy of the partnership agreement accepted, the Commissioner now concedes the increase to have been improper. Accordingly, on remand, the estate tax must be appropriately adjusted for this item.
3. Not at issue is a deduction of $109,683.70 asserted by Mrs. Goodall in her 1956 return as interest paid that year to the District Director at Omaha with respect to income tax deficiencies for 1950/53. The Director, on receipt of the payment, placed it in his suspense account. The Commissioner disallowed the interest deduction and the Tax Court sustained him on the authority of Jacob J. Shubert, 41 T.C. 243 (1963) (). The Commissioner now concedes that "the interest payment was received and acknowledged as such" by him and that the deduction was proper. Accordingly, on remand, Mrs. Goodall's 1956 tax must be appropriately adjusted for this item.
4. Not at issue are the corporation's deductions in fiscal 1950/54 of amounts accruing to the partnership under the manufacturing and rental agreement. The Commissioner disallowed the major portion of these on the ground that they were not ordinary and necessary business expenses under § 23(a) (1) (A) and thus were equivalent to dividends. The Tax Court, however, held that the amounts were deductible in their entirety. The Commissioner has not petitioned for review of this ruling which is adverse to him.
5. Not at issue is the character of the substantial withdrawals made by the partners from the corporation. The Commissioner determined that these withdrawals were not loans, as the partners claimed, but...
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