Helvering v. Chicago Stock Yards Co

• Decision Date: 12 April 1943
• Docket Number: No. 488,488
• Citation: 63 S.Ct. 843,318 U.S. 693,87 L.Ed. 1086
• Parties: HELVERING, Commissioner of Internal Revenue, v. CHICAGO STOCK YARDS CO
• Court: U.S. Supreme Court

318 U.S. 693

63 S.Ct. 843

87 L.Ed. 1086

HELVERING, Commissioner of Internal Revenue,

v CHICAGO STOCK YARDS CO.

No. 488.

Argued March 9, 10, 1943.

Decided April 12, 1943.

Mr. Samuel O. Clark, Jr., Asst. Atty. Gen., for petitioner.

Mr. George Wharton Pepper, of Philadelphia, Pa., for respondent.

Mr. Justice ROBERTS delivered the opinion of the Court.

The Board of Tax Appeals sustained the petitioner's determination of deficiencies in the respondent's income tax for 1930, 1932, and 1933.¹ The Circuit Court of Appeals reversed the Board's decision.² We granted certio- rari because of the importance of the questions involved. 317 U.S. 619, 63 S.Ct. 258, 87 L.Ed. —-.

The challenged assessment was of the fifty per cent. additional tax imposed by § 104 of the Revenue Acts of 1928 and 1932.³ The section, which is substantially the same in both statutes, provides, in subsection (a), that if any corporation is formed or availed of for the purpose of preventing the imposition of surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, the additional tax shall be imposed. That the corporation 'is a mere holding or investment company,' or that the gains or profits are 'permitted to accumulate beyond the reasonable needs of the business,' is declared, by subsection (b), prima facie evidence of a purpose to avoid the surtax.

The Union Stock Yards & Transit Company of Chicago, hereinafter called Transit Company, was incorporated in 1865 to operate stock yards in Chicago. Its business was profitable. Frederick H. Prince became a stockholder. In 1890 packers, who were the company's principal source of business, threatened to remove their plants from Chicago unless they were given a share in its profits. Due to limitations in its charter, the corporation could not raise funds necessary to buy off the packers. Mr. Prince and other stockholders met the situation by organizing a holding company under the law of New Jersey, The Chicago Junction Railways & Union Stock Yards Company, hereinafter called the New Jersey Company, which acquired all of the capital stock of the Transit Company. The capital structure at organization was 65,000 shares each of preferred and common, all of $100 par. Collateral trust bonds, secured by Transit Company stock, were issued, of which $14,000,000 were ultimately out- standing.

The charter was to expire in 1940. The New Jersey Company came to own all of the stock of the Transit Company, of a railway company, a railroad company, and all beneficial interest in a real estate trust, which themselves, or through subsidiaries, pursued activities collateral to the stock yards' business. By payments in cash and its own bonds it procured from the packers an agreement to maintain the stock yards at their then location for fifteen years.

When this agreement was about to expire the packers presented fresh demands and Mr. Prince was compelled to devise some method of satisfying them. He decided that if he could obtain the cooperation of the largest he need not trouble about the others. To attain this end he organized, in 1911, the respondent, a Maine corporation. He formed a committee which made a proposal to the New Jersey Company's common stockholders that the respondent would purchase their stock by giving them $200 par of its 5% bonds for each share of common stock or, in the alternative, would stamp the stock with the company's agreement to guarantee a 9% dividend upon it; this in consideration that the respondent should be entitled to all of the New Jersey Company's earnings over and above its expenses, interest charges, and the guaranteed dividend on the common. Thus it was intended to draw into the taxpayer's treasury the excess of the New Jersey Company's earnings. Armour & Co. was given 20% of the respondent's stock, Prince retaining 80% of it. In this way Armour was to share in the earnings of the stock yards.

By a decree in a suit under the Sherman Act, 15 U.S.C.A. §§ 1 7, 15 note, Armour was ordered to part with all interest in the stock yards. In consequence Mr. Prince purchased the Armour-held stock for $1,000,000, which sum was loaned to him by the respondent. Thus Prince became the taxpayer's only stockholder and it is conceded that he retained owner- ship or voting power which gave him sole control of the company to the close of 1933.⁴

By August 1914 the respondent had acquired, in exchange for its bonds, 31,075 common shares of the New Jersey Company and 33,922 shares had been stamped with its guarantee. In 1919 it acquired the three remaining shares. In the period from 1915 to 1933 it organized two small whollyowned subsidiaries to transact business connected with the stock yards' enterprise, and also organized, and held four-fifths of the capital stock of, a national bank intended to serve the stock yard district.

The respondent in addition to the New Jersey Company common stock acquired by exchange of its own bonds therefor, bought such stock for cash. By December 31, 1929, it had acquired 58,742 of the 65,000 shares outstanding.

As the charter of the New Jersey Company was to expire in 1940, Mr. Prince, at some date not clearly fixed by the testimony, formed the plan of accumulating cash in the respondent's treasury sufficient to pay the debts of the New Jersey Company and liquidate it by that time. To do this it would be necessary to redeem the outstanding preferred stock at par, pay off the $14,000,000 mortgage and over $6,000,000 of fixed obligations of subsidiaries which had been guaranteed by the New Jersey Company. It would also be necessary to purchase 6,258 shares of New Jersey common not then owned. Thus, as of December 31, 1929, the plan involved the expenditure of about $28,000,000 by 1940. If it could be consummated, the taxpayer would then own the entire stock yards enterprise clear of debt other than its own bonds then outstanding in the amount of $3,227,000 due in 1961. That enterprise, treated as a whole, then had cash and liquid assets amounting to $21,705,185,⁵ and fixed and other assets of a book value of $40,000,000. The bulk of the liquid assets had been drawn up into the respondent's treasury by virtue of the agreement with the New Jersey Company's stockholders.

The respondent's assets December 31, 1929, exceeded its liabilities, including its capital stock, by $19,622,355. From that date to the close of 1933 its earnings were $10,243,373, of which $1,600,000 was paid out in dividends, and $8,643,373 was added to earned surplus.⁶

These are the salient facts. They are stated in greater detail by the Board and by the court below.

The Board reached these conclusions: That the respondent was a mere holding or investment company as defined by § 104, and had not overcome the consequent presumption that its surplus had been accumulated for the purpose of avoiding surtax upon the earnings of Mr. Prince, as sole stockholder; that, although it was more than a mere holding or investment company, its profits had been permitted to accumulate beyond the reasonable needs of the business, and the evidence did not overcome the prima facies which § 104(b) attributes to this fact; and that, without the benefit of the presumptions created by § 104(b), the proofs require the conclusion that the respondent had been availed of for the purpose of accumu- lating profits beyond its needs for the purpose of avoiding surtax upon its stockholder.

The Circuit Court of Appeals held that, viewing the facts most favorably to the Government, the respondent was not a mere holding or investment company within the meaning of the statute; that, in concluding the company had accumulated profits beyond its reasonable needs, the Board had employed a wrong yardstick in that it had failed to give weight to the controlling purpose of the accumulation, namely, the long range plan to liquidate the New Jersey Company and consolidate all the assets, free of debt, in the respondent; and, finally, that, in purporting to reach its final conclusion without reference to the statutory presumptions, it had allowed them to affect its judgment. Accordingly the court reversed and directed the Board to retry the case in conformity to the court's opinion.

The...