Henry Van Hummell, Inc. v. CIR, 8104.

• Decision Date: 12 September 1966
• Docket Number: No. 8104.,8104.
• Parties: HENRY VAN HUMMELL, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Tenth Circuit

364 F.2d 746 (1966)

HENRY VAN HUMMELL, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 8104.

United States Court of Appeals Tenth Circuit.

August 15, 1966.

Rehearing Denied September 12, 1966.

COPYRIGHT MATERIAL OMITTED

Morrison Shafroth, Denver, Colo. (Grant, Shafroth, Toll & McHendrie, John N. Dahle, and James H. Skinner, Jr., Denver, Colo., on the brief), for petitioner.

Robert A. Bernstein, Atty., Dept. of Justice, Washington, D. C. (Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson and Meyer Rothwacks, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before LEWIS, BREITENSTEIN and SETH, Circuit Judges.

SETH, Circuit Judge.

This is a petition for review of a decision of the Tax Court (23 T.C.M. 1765) which upheld the Commissioner's determination that petitioner was subject to the accumulated earnings tax imposed under Section 531 of the 1954 Internal Revenue Code. The Tax Court concluded that the petitioner accumulated profits in excess of the needs of the business, and that the accumulation was to avoid taxes. The deficiencies found were for the years 1956, 1957, 1958, and 1959, and total $147,204.60. The petitioner moved the Tax Court for a new trial and for reconsideration, but the motion was denied.

On this appeal the petitioner asserts that the findings of the Tax Court on the critical issues are in error, and not supported by the evidence. Taxpayer corporation urges generally that its business needed the accumulations to meet the hazards and the uncertainties of its business.

The petitioner is a closely held corporation engaged in the sale by mail and the servicing of annual renewable group life insurance to some 75,000 to 80,000 members of the Federal Postal Employees Association. The petitioner collected the premiums from the members and remitted them to the insurance company which had written the group life insurance policy. The petitioner entered into a contract with the Federal Postal Employees Association in 1928 and extended in 1936 for a term of fifty years, which gave it the exclusive right to handle the annual renewal term insurance for its members, to recruit membership, and to publish its magazine. The petitioner has some eighty employees, a building, and the necessary machinery to handle the very large volume of correspondence with the membership of the Association.

The petitioner's income is derived, under its contract with the Association, primarily from the mortality refund which accrues under the insuring agreement between the Association and the insurance carrier. This refund is the difference between the total group insurance premiums and the total of all insurance claims, commissions, and a percentage charge paid to the insurance carrier. The Association initially receives this refund annually and remits it to the petitioner. If the death claims in any year should exceed the premium totals the insurance carrier reserves the right to deduct such excess from future mortality refunds. The petitioner also receives by way of income the dues from the Association members, some insurance commissions on the Association insurance, interest on investments, and some rents. For the years in issue the mortality refund constitutes about seventy per cent of petitioner's income, and without it the corporation would have operated at a deficit.

The Tax Court found for the years in issue (1956, 1957, 1958, and 1959) the actual ordinary cash operating expenses of petitioner ranged from $647,170 to $832,633 with an additional extraordinary amount in one year of $180,000. The Tax Court also found that as of the end of 1956 the corporation had accumulated net liquid assets (net current assets plus investments not integral to business) available for business needs in an amount of $1,189,476, and at the end of 1959 this figure was $1,536,056, or an increase of $491,706. During this period dividends were paid ranging from 41.80 per cent of net income to 62.35 per cent of net income, and there were also substantial salaries paid to stockholder officers.

As indicated above, the corporation was closely held as members of one family owned some 95 per cent of its stock. The Government witness computed the total family tax savings resulting from the retention of earnings claimed to be excessive was $309,000. The corporate investments were primarily in Government bonds and in unrelated stocks. In 1958 and 1959 substantial investments were made in Willows Realty Company. Also the company office building was sold to it in exchange for stock. The Willows Company was owned primarily by the same family.

The Internal Revenue Code of 1954 provides for the imposition of an accumulated earnings tax upon corporations availed of for the purpose of avoiding income taxes with respect to its shareholders by permitting earnings and profits to accumulate instead of being distributed (Sections 531, 532.) The next following Section of the Code provides that the fact that earnings and profits are permitted to accumulate "beyond the reasonable needs of the business shall be determinative of the purpose to avoid the income tax with respect to shareholders, unless the corporation by the preponderance of the evidence shall prove to the contrary" (Section 533).

The initial determination under the statute is one of fact — whether the accumulation is beyond the reasonable needs of the business. The reasonableness of the needs is necessarily for determination by those concerned with the management of the particular enterprise. This determination must prevail unless the facts show clearly the accumulations were for prohibited purposes. The Tax Court expressed this doctrine in its opinion, examined the purposes advanced by the petitioner for the accumulations, and found that they were nevertheless beyond the reasonable needs of the corporation. This finding is, of course, one of fact made by the court, and if supported by the record it must stand. World Publishing Co. v. United States, 169 F.2d 186 (10th Cir.); KOMA, Inc. v. Com'r of Internal Revenue, 189 F.2d 390 (10th Cir.).

The record shows that the reasonable needs of the business fell considerably below the amount accumulated. As indicated above, the Tax Court's calculation of actual cash operating expenses for each year involved ranged from $647,170 in 1956 to $832,633 in 1959. The net liquid assets available increased this same period...