Helvering v. Gordon
| Decision Date | 29 January 1937 |
| Docket Number | No. 10697.,10697. |
| Citation | 87 F.2d 663 |
| Parties | HELVERING v. GORDON. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Joseph M. Jones, Sp. Asst. to Atty. Gen. (Robert H. Jackson, Asst. Atty. Gen., and J. Louis Monarch, Sp. Asst. to Atty. Gen., on the brief), for petitioner.
Edgar M. Morsman, Jr., of Omaha, Neb., for respondent.
Before GARDNER, SANBORN, and THOMAS, Circuit Judges.
This case comes here on the petition of the Commissioner of Internal Revenue to review a decision of the United States Board of Tax Appeals, which redetermined an alleged deficiency in respondent's income tax for 1930.
The Commissioner determined a deficiency for that year in respondent's income tax in the amount of $2,096.38 for failure to include in his gross income alleged unreported dividend distributions of the Gordon Can Company, a corporation owned by respondent and his wife, Almyra B. Gordon.
The capital stock of the Gordon Can Company, a corporation engaged in manufacturing tin cans, consisted of 990 shares of which the respondent owned 790 shares and his wife 200 shares. Due to the fact that respondent was a close personal friend of C. S. Davis, of the firm of C. S. Davis & Co., from whom the Gordon Can Company purchased tin plate, the business of the company was very profitable. Because of this friendship, Gordon, as president of the Gordon Can Company, was able to purchase from C. S. Davis & Co. tin plate at a price considerably below the prevailing market price.
The Gordon Can Company is located in Omaha, Neb., where it had three large customers. It was believed that if they knew the amount of the corporation's profits they would insist upon a reduction in the prices paid by them for the tin cans manufactured by the company. By reason of a provision in the Revenue Act of 1924 (43 Stat. 293, § 257) making income tax returns open to the public it was possible for these three customers to ascertain the profits earned by the Gordon Can Company.
For the purpose, among other things, of concealing from such customers the large profits of the Gordon Can Company, the respondent and his wife in 1924 organized the Wallace Realty Company, a corporation with a capital stock of 100 shares, 50 of which were owned by respondent and 50 by his wife from the date of incorporation until July 1, 1925, on which date respondent transferred 45 shares to his wife. From then until November 5, 1927, respondent held 5 shares and his wife 95. On that date respondent's wife transferred 50 shares of the stock to the First Trust & Savings Company of Chicago, Ill., in trust for the benefit of herself, her husband, and others, her husband, the respondent, being named a cotrustee.
After the organization of the Wallace Realty Company, in accordance with an arrangement between Gordon and Davis, the difference between the price (approximately the market price) at which the tin plate was billed by C. S. Davis & Co. to the Gordon Can Company and the lower price for which it was actually purchased was rebated to the Wallace Realty Company. Before the organization of the Wallace Realty Company, the tin plate had been purchased directly for the lower price without any rebate, and the profits realized by the Gordon Company were disclosed in its income tax returns.
On February 27, 1926, the day following the enactment of the Revenue Act of 1926 (44 Stat. 9), which repealed the provision of the 1924 Act making income tax returns open to the public the Gordon Can Company wrote to C. S. Davis & Co.:
These instructions were countermanded on November 15, 1926, when C. S. Davis & Co. was advised by the Gordon Can Company to bill the tin plate "on the same basis that you billed them a year ago, sending the commission check to the Wallace Realty Company."
The earnings, dividends paid, federal income taxes paid, organization expenses written off, and the surplus at the end of each taxable year from 1924 to 1929, inclusive, of the Wallace Realty Company were as follows:
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| | | | |
| Gross Earnings | | | |
| | | | |
|---------------------------| | | |
Year | Commissions | | | | |
| Received | | | | |
| From | | | | Federal | Surplus
| C. S. Davis | | Net | Dividends | Income | End
| & Company | Other | Income | Paid | Tax Paid | of Year
------|-------------|-------------|-------------|-------------|-------------|------------
1924 | $ 43,558.48 | ........ | $ 43,480.23 | ......... | ........ | $ 43,480.23
1925 | 49,422.51 | $ 5,123.39 | 54,268.34 | $ 10,000.00 | $ 5,435.03 | 82,313.54
1926 | 13,488.28 | 3,641.45 | 16,988.99 | 20,000.00 | 8,665.36 | 70,637.17
1927 | 19,006.85 | 5,329.77 | 24,149.00 | 40,000.00 | 2,921.47 | 51,864.70
1928 | 37,369.87 | 1,206.22 | 38,402.42 | 40,000.00 | 4,878.29 | 45,071.88
| | | | | (1) 316.95 |
1929 | ......... | (2)2,703.87 | 2,612.85 | 10,000.00 | ........ | 37,684.73
|-------------|-------------|-------------|-------------|-------------|------------
| 162,845.99 | 18,004.70 | 179,901.83 | 120,000.00 | 22,217.10 | $331,052.25
| | | | | |
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(1) Organization expense written off
(2) Includes income tax refund of $2,565.93
The aggregate expenses of the Wallace Realty Company for the same period were $948.86. The company had no earnings for 1930.
On December 12, 1930, the Wallace Realty Company distributed $20,000 as a dividend to its stockholders of record at that time, of which sum Gordon, the respondent, as owner of 5 shares of the capital stock, received $1,000, for which he accounted in his income tax return for that year. On the ground that the $1,000 is all of the total sum distributed received by respondent, the Board of Tax Appeals held that his return was correct. It is the contention of the Commissioner that he constructively received 790/990 of the $20,000 distributed; that is, that he should account for the $20,000 in his income tax return for 1930 on the basis of his stock holdings in the Gordon Can Company. This claim is based upon the ground that the $20,000 were the earnings of and owned by the Gordon Can Company; that the Wallace Realty Company was a mere agent of the Gordon Can Company to receive its profits and to disburse them as directed by the principal; that both corporations were owned, dominated, and directed by the respondent; and that the manipulation of the two corporations was a device not only for concealing from the customers of the Gordon Can Company its very large profits, but that it was used at least, also, for evading federal income taxes by the respondent.
The question here for determination is, therefore, whether under the foregoing facts and circumstances the $20,000 distributed to its stockholders by the Wallace Realty Company in 1930 should under the law be taxed as income to the respondent on the basis of his stock holdings in the Gordon Can Company.
Section 22 of the Revenue Act of 1928, c. 852, 45 Stat. 791, 797 (26 U.S.C.A. § 22 and note), in effect at the time in question, defines "gross income" as including "gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid."
Section 115 of the same act (26 U.S.C. A. § 115 and note) provides that, "The term `dividend' when used in this title chapter * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913." (Italics supplied.)
The principle that substance and not form should control in the application of tax laws, United States v. Phellis, 257 U. S. 156, 42 S.Ct. 63, 66 L.Ed. 180; MacQueen Co. v. Commissioner (C.C.A.3) 67 F.(2d) 857, 858; Lonsdale v. Commissioner (C.C.A.8) 32 F.(2d) 537, 539, is pertinent in this case. Tax laws deal with realities and look at the entire transaction, Shoenberg v. Commissioner (C.C.A.8) 77 F.(2d) 446, 449; Helvering v. Security Savings & Commercial Bank (C.C.A.4) 72 F.(2d) 874; Ahles Realty Corporation v. Commissioner (C.C.A.2) 71 F.(2d) 150.
Looking through form to substance, therefore, as we must,...
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