Hemphill Schools v. Com'r of Internal Revenue

• Decision Date: 26 August 1943
• Docket Number: No. 10318.,10318.
• Parties: HEMPHILL SCHOOLS, Inc., v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

137 F.2d 961 (1943)

HEMPHILL SCHOOLS, Inc., v. COMMISSIONER OF INTERNAL REVENUE.

No. 10318.

Circuit Court of Appeals, Ninth Circuit.

August 26, 1943.

Thomas R. Dempsey, Wellman P. Thayer, Arthur H. Deibert, and William L. Kumler, all of Los Angeles, Cal., for petitioner.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, J. Louis Monarch, Helen Goodner, and Carleton Fox, Sp. Assts. to Atty. Gen., for respondent.

Before WILBUR, MATHEWS, and STEPHENS, Circuit Judges.

MATHEWS, Circuit Judge.

Here for review is a decision of the Board of Tax Appeals, now called the Tax Court of the United States, which sustained a determination by respondent, the Commissioner of Internal Revenue, that there was a deficiency of $66,858.86 in respect of petitioner's income tax for its fiscal year ended March 31, 1936. The determination was based on § 102 of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev. Acts, page 690, which provides:

"(a) Imposition of Tax. There shall be levied, collected, and paid for each taxable year upon the adjusted net income of every corporation (other than a personal holding company as defined in section 351) if such corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders or the shareholders of any other corporation, through the medium of permitting gains and profits to accumulate instead of being divided or distributed, a surtax equal to the sum of the following:

"(1) 25 per centum of the amount of the adjusted net income not in excess of $100,000, plus

"(2) 35 per centum of the amount of the adjusted net income in excess of $100,000.

"(b) Prima Facie Evidence. The fact that any 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, shall be prima facie evidence of a purpose to avoid surtax."

Petitioner is a corporation. It is not a personal holding company. Its adjusted net income for the taxable year — the fiscal year ended March 31, 1936 — was $220,889.68. Its income tax, exclusive of surtax, for the taxable year was $30,372.33. It overpaid that amount by $452.53. Respondent (1) determined that petitioner's gains and profits were permitted to accumulate beyond the reasonable needs of its business, hence (2) determined that petitioner was availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting gains and profits to accumulate instead of being divided or distributed, hence (3) determined that petitioner was required by § 102 to pay a surtax of $67,311.39,¹ and hence (4) determined that there was a deficiency of $66,858.86.² Petitioner alleged and respondent denied that these determinations were erroneous. After a hearing, at which both parties produced evidence, the Board made its report, including therein its findings and opinion,³ and entered the decision here under review.

Petitioner says that the Board "erred in failing to find from the evidence that at March 31, 1936, petitioner's known business needs for cash were in excess of the amount which it then possessed." No such finding was required. The issue was not whether petitioner's known business needs for cash exceeded the amount which it possessed on March 31, 1936. The issue was, instead, whether petitioner's gains and profits were permitted to accumulate beyond the reasonable needs of its business.

Petitioner says that the Board "erred in holding that, to provide for its known future business needs, petitioner, at March 31, 1936, should have relied on the potential income contained in some $787,000 due from students⁴ on installment tuition contracts." The Board did not so hold. It did, in its opinion, note the undisputed fact that, at the close of the taxable year, $787,000 was payable to petitioner under contracts with students, but it did not hold that petitioner should have relied on that "potential income" to provide for its known future business needs.

Petitioner says that the Board "erred in refusing to admit as evidence exhibits offered on behalf of petitioner containing what the books and records showed for the taxable years ended March 31, 1939, March 31, 1940, and March 31, 1941." Petitioner's brief does not, as required by our rules,⁵ "quote * * * the full substance of the rejected exhibits, and refer to the page number in the * * * transcript where the same may be found." No such reference could be made, for the rejected exhibits are not in the transcript. We have no means of knowing what they are, what they contain or what they show or tend to show. We therefore cannot say that their rejection was error. Much less can we say that it prejudiced petitioner.

Petitioner says that the Board "erred in failing to find that during the taxable year of its sole stockholder⁶ within which petitioner's taxable year in question closed, petitioner did distribute, as taxable dividends, substantially all the cash which was actually available for distribution at the close of petitioner's taxable year." Whether petitioner made such a distribution was not an issue in the case. Hence no finding on that subject was required.

Petitioner says that the Board "erred in holding that the evidence does not overcome respondent's determination that petitioner was availed of for the purpose of permitting gains and profits to accumulate instead of being distributed." What the Board actually held was this:

"Petitioner was availed of * * * for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting gains and profits to accumulate instead of being divided or distributed.

"The determination of the respondent that the provisions of section 102 of the Revenue Act of 1934 are applicable to the net income of petitioner for the taxable year is presumed to be correct and must stand unless overcome by evidence. * * *

"The controlling question is whether petitioner permitted its gains and profits to accumulate beyond the reasonable needs of its business. Such fact is by statute `prima facie evidence of a purpose to avoid surtax.' Section 102(b).

"The burden was upon petitioner to establish that undistributed accumulated profits were not beyond the reasonable needs of its business. * * *

"The evidence does not overcome the determination of respondent that petitioner was availed of for the purpose of preventing the imposition of surtax upon its shareholders by permitting gains and profits to accumulate beyond the reasonable needs of the business instead of being distributed. Accordingly, we sustain the respondent."

The Board's holding that pet...