Gray Holding Corp. v. Clauson
| Decision Date | 02 March 1951 |
| Docket Number | No. 182.,182. |
| Citation | 95 F. Supp. 928 |
| Parties | GRAY HOLDING CORP. v. CLAUSON. |
| Court | U.S. District Court — District of Maine |
B. A. Brickley, Charles W. O'Brien, Boston, Mass., Leonard A. Pierce, Jotham D. Pierce and Edward W. Atwood, all of Portland, Me., for plaintiff.
Andrew D. Sharpe, Washington, D. C., Alton A. Lessard, U. S. Atty., Edward J. Harrigan, Asst. U. S. Atty., Portland, Me., for defendant.
This is an action for the recovery of $2,854.08, representing income taxes paid by the taxpayer, Gray Holding Corporation, to the defendant, Collector of Internal Revenue for the District of Maine, for the years 1939 and 1940, together with legal interest thereon.
The ground upon which this refund is sought is that the plaintiff corporation was not engaged in business so as to subject its income to taxation and, therefore, that its income was taxable only to its stockholders. The plaintiff contends that it is merely the agent of its stockholders to hold legal title to their stock in Maine and New Hampshire Theatres Company (hereinafter referred to as Theatres Company), and to act as a mere conduit or agent for them in receiving, and immediately transmitting to them, the dividends which each stockholder is entitled to receive on the Theatres Company stock. Plaintiff asserts that its activities throughout its entire history demonstrate its sole purpose to have been the furtherance of the convenience of the stockholders. In short, plaintiff contends that it is not a real corporation for income tax purposes.
On the other hand, the defendant contends that the plaintiff is a real corporation and an entity separate and distinct from its stockholders. Defendant cites the broad corporate purposes stated in plaintiff's charter, and the activities of plaintiff since its incorporation, in support of that contention. The defendant asserts that plaintiff is not the agent, alter ego or conduit of its stockholders, and is not exempt from the corporation income tax.
Theatres Company was incorporated at Lewiston, Maine, August 4, 1919. Since that date it has been engaged in the business of promoting and managing a chain of theatres in Maine, New Hampshire, Massachusetts and Vermont.
One-half of the capital stock issued by Theatres Company was subscribed by Olympia Theatres, Inc., and certain individuals associated with Olympia Theatres, Inc. The other half of the Theatres Company stock was subscribed by six individual investors. Under the By-Laws of Theatres Company, as they were in effect from its inception through the year 1940, each half interest of the stock had the right to select one half of the Board of Directors. The directors chosen by the six individual investors, above referred to, or by the successors in legal title to their stock in Theatres Company, were designated as "Group A"; while the directors chosen by the holders of the other half of the stock were designated as "Group B". In this opinion, for convenience, the stockholders who elect the Group A directors are referred to as the Group A stockholders, and their stock as the Group A stock.
The By-Laws of Theatres Company also provided that one of the Group A directors should be the President of Theatres Company, and that the Group A directors should have routine control and management of the business and property of Theatres Company, including the appointment of the General Manager. The Group B directors would participate in the election of all officers other than the General Manager, and in decisions of the Board of Directors not relating to the routine management of the business and property. The By-Laws provided that "all matters other than those relating merely to the ordinary conducting of the business shall require the affirmative vote or written approval" of two more than the number of directors in either group alone. Copies of the corporate records of Theatres Company for the years 1926 through 1940, which are in evidence, demonstrate that the scheme of control above outlined was faithfully followed during those years.
On June 1, 1920 the six Group A stockholders joined in executing a trust agreement (the Hislop Trust). That agreement recited that the shares of Theatres Company held by those stockholders were "exactly one-half of the entire outstanding stock of the said Company, which company was organized with the understanding the rights and powers of each combined half ownership should forever remain equal and intact, and the parties hereto desire to protect their several interests by preventing any fraction of said half ownership getting into hands which may defeat said understanding, and for that purpose to cause it to be voted as a unit." The six Group A stockholders transferred their Theatres Company stock to Albert Hislop, one of their number, as Trustee, and directed the officers of Theatres Company to cancel their certificates of stock and issue to the Trustee, in lieu thereof, one certificate for the entire block of stock. The Trustee then issued to each investor a trustee's receipt for the number of shares of Theatres Company stock so transferred by such investor.
The Hislop Trust agreement provided that the Trustee should "receive the dividends on said stock in his hands and shall immediately upon the receipt of any dividend pay to each of the holders of said trustee's receipts his proportionate part thereof." The agreement further prohibited the transfer or encumbrance of Theatres Company stock by any holder of a trustee's receipt except upon the written consent of the others, and subject to the terms and conditions of the agreement.
The Trustee was instructed as to the manner of voting the stock held by him for "the one-half directorate to which this half interest in the stock of the corporation is entitled." He was also instructed to vote against any change in the equally balanced control of Theatres Company and to vote against any other change in the By-Laws or operation of Theatres Company, unless a majority in interest of the holders of trustee's receipts should first agree to the change.
The trust agreement further provided that "the Directors representing this one-half of the capital stock of said Company shall endeavor, if possible, to vote on all questions alike and by agreement, and on very important matters where the control of the company may be directly or indirectly involved as to management they shall follow the instructions of a majority in interest of the holders of receipts and until they get said consent, they shall vote against changes and to maintain the situation that then exists."
Provision was also made in the Hislop trust agreement for the replacement of the trustee, the disposition of trustee's certificates owned by any holder at his death, and for the termination or renewal of the trust at the end of a five year term.
The records introduced in evidence do not indicate what manner of proceeding followed the expiration of the five year term of the Hislop trust. From all the facts, however, it is reasonable to infer that the provisions of the trust were continued in effect by agreement until January 1, 1927. On that date the ten persons who were then the Group A stockholders joined in a new trust agreement, the so-called Gray Trust. The provisions of this trust were similar in most respects to those of the Hislop Trust, the principal difference being that the size of the majority vote of the beneficial owners, necessary for approval of any fundamental change in the organization of Theatres Company, was increased from a bare majority in interest to a 90% majority in interest. William P. Gray was named Trustee; and the term of the Gray Trust was stated to be ten years.
Subsequently, a dividend of Theatres Company stock, making no change in the balance of ownership of the Company, was reflected by a proportionate increase in the number of trustees certificates held by each beneficial owner of the Gray Trust. From time to time, by agreement of the beneficial owners of the Group A stock, certain trust receipts were transferred to new owners, among them members of the family of one of the original owners, and other persons, which did not necessitate any change in the record title to the Group A stock on the books of Theatres Company.
Against this background, Gray Holding Corporation, the plaintiff here, was organized on February 12, 1931. The holders of trustee's receipts from the Gray Trust transferred them to the plaintiff, receiving in exchange equivalent amounts of plaintiff's capital stock. Legal title to the Group A stock of Theatres Company was transferred by the Gray Trust to plaintiff; and the Gray Trust was dissolved. This Court finds that the sole reason for the shift to the corporation form was to provide a permanence which was not possible under a trust and to afford a better means of perfecting and carrying out the original purpose of the Group A stockholders to protect their block of stock. There is no suspicion of any attempt to evade lawful taxes by this procedure.
The corporate powers of plaintiff were recited in the incorporation certificate in very general terms. They included powers to purchase, acquire, hold and dispose of any bonds or other securities or evidences of indebtedness or any shares of capital stock created or issued by any other corporation or corporations, association or associations, of any State, territory or country; to exercise all the rights, powers and privileges of ownership of such property held by the plaintiff, including the power to vote any capital stock; to aid in any manner any corporation or association of which any bonds or other securities, or evidence of indebtedness or stock are held by plaintiff, and to do any acts or things designed to protect, preserve, improve or enhance the value of any such property; to purchase, hold, sell, and otherwise deal in its own capital stock, bonds or other obligations, but to use, in effect,...
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Lowndes v. United States
...National Carbide case and has been considered by at least one district court to be no longer persuasive authority. Gray Holding Corp. v. Clauson, 95 F.Supp. 928 (D.Me.1951). 9 Lack of business purpose is more usually found when a corporation is initially organized solely as a tax saving dev......