House Beautiful Homes, Inc. v. CIR, 9773.

• Decision Date: 19 December 1968
• Docket Number: No. 9773.,9773.
• Parties: HOUSE BEAUTIFUL HOMES, INC., Highland Homes, Inc., Spears Realty Company, Inc., Spears Development Company, Inc., X-Cel Contracting Company, Inc., Johnson County Development Company, Inc., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Tenth Circuit

405 F.2d 61 (1968)

HOUSE BEAUTIFUL HOMES, INC., Highland Homes, Inc., Spears Realty Company, Inc., Spears Development Company, Inc., X-Cel Contracting Company, Inc., Johnson County Development Company, Inc., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 9773.

United States Court of Appeals Tenth Circuit.

December 19, 1968.

Byrne A. Bowman and Thomas F. McIntyre, Oklahoma City, Okl. (Mervin E. Templin, Oklahoma City, Okl., on the brief), for petitioners.

Elmer J. Kelsey, Atty., Dept. of Justice, Washington, D. C. (Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson and David O. Walter, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before MURRAH, Chief Judge, and BRIETENSTEIN and HILL, Circuit Judges.

HILL, Circuit Judge.

This is a petition for review of a decision of the Tax Court upholding a determination by the Commissioner of Internal Revenue denying the $25,000 surtax exemption¹ to each of six related corporations engaged in the home building industry. Applying the provisions of section 269 of the Internal Revenue Code of 1954² the Commissioner determined that the petitioners were incorporated for the principal purpose of evasion or avoidance of federal income tax through the securing of the benefit of multiple surtax exemptions. The denial of the surtax exemptions resulted in a deficiency in the total amount of $62,983.23 for the years 1958, 1959 and 1960.

The six corporate petitioners, House Beautiful Homes, Inc., Highland Homes, Inc., Spears Realty Company, Inc., Spears Development Company, Inc., X-Cel Contracting Company, Inc., and Johnson County Development Company, Inc., were all formed by their principal shareholder, Julius Spears,³ and together with six other related corporations constitute the total of twelve corporations that he utilized to engage in the development of land and the construction and sale of residences thereon. Of the six remaining corporations, one of them, Spears Painting and Decorating, Inc., was present in the Tax Court but having prevailed there is not before us on this appeal.⁴ Four of the remaining six corporations, Spears Construction Co., Inc., Quality Spears Contractors, Inc., Beverly Hills Development Co., Inc., and Jay Dee Realty Sales Co., Inc., have chosen to pay the deficiency assessment and prosecute suits for refund in the federal district court which has yet to render a decision. The sixth and last of the remaining related corporations, Spears Building Co., Inc., was the first to be formed by Julius Spears and not having been assessed a deficiency is not embroiled in this or any other similar tax litigation.

Although we are concerned solely with the six corporations instituting this appeal, we shall consider, as did the Tax Court, the evidence relating to all twelve of the related corporations. This is necessary in order to properly reflect the correct relationship of each corporation in the overall scheme of Julius Spears' organization. It is only in this context that the principal motivation giving rise to each corporate birth can be ascertained.

The facts are without dispute and indicate that after a few years of successful experience in small scale home construction conducted in an individual capacity, Julius Spears acquired partially developed land in Overland Park, Kansas, and subsequently completed the necessary improvements, e. g., installation of sewer lines, streets, etc. This property was known as Maple Crest No. 2.

On October 9, 1951, Julius Spears formed Spears Building Co., Inc., to which he contributed an initial capital investment of $10,000 receiving in return all the common stock of the corporation except qualifying shares. He then transferred several lots in Maple Crest No. 2 to that corporation which then completed a few remaining development details, built houses and sold them.

After purchasing Maple Crest No. 2, Julius Spears purchased Edlunds Resurvey, a 5-acre tract of land located a few blocks from Maple Crest No. 2. He then formed two corporations, Spears Construction and petitioner, Spears Development, and transferred certain lots in Edlunds Resurvey to Spears Development which in turn transferred some of the lots, subject to developmental completion, to Spears Construction. The latter built houses on the improved lots and sold them to various customers. Petitioner, Spears Development, had no employees other than its president, Julius Spears, and had no capital investment in equipment of any kind choosing instead to subcontract all development work to others. Spears Construction used some of the employees of Spears Building to perform its primary function of the construction of houses although it had no employees other than those who were or had been employees of Spears Building. As will be indicated below, in 1955 Spears Construction began to develop land as well as construct houses.

In 1953 the fourth corporation, petitioner Spears Realty, was formed to sell the houses constructed by Spears Building and Spears Construction. Hence, this petitioner was engaged in performing the sales function — previously handled primarily by Spears himself — for Spears enterprises until in 1955, like Spears Construction, it too joined in the land development business. In 1954 two more corporations, Quality Spears Contractors⁵ and Spears Painting and Decorating, were organized. These were complemented in 1955 by the formation of Highland Homes, House Beautiful, Jay Dee Realty, Johnson County Development and X-Cel Contracting. The twelfth and last corporation, Beverly Hills Development, was incorporated on January 10, 1956. Each of these corporations received all their somewhat meager equity investment through cash contributed by Julius Spears who was a director and president as well as the principal shareholder of each corporation.

On February 24, 1955, Julius Spears purchased a 170-acre tract of land in Johnson County, Kansas, known as the Beverly Hills Addition. Shortly thereafter, another larger tract, Rancho Santa Fe, was acquired in Johnson County. This property was located 25 blocks from Beverly Hills and 18 blocks from Maple Crest No. 2. The Rancho Santa Fe and Beverly Hills properties constituted the bulk of the lands which were to be the subject of various transactions among the petitioners and between the petitioners and other of the related corporations.⁶

In 1956, Highland Homes acquired 37 lots in the Beverly Hills Addition from Beverly Hills Development which had earlier purchased the land from Julius Spears ostensibly to develop the land for the later construction of homesites. After purchasing the aforementioned 37 lots, Highland Homes employed architects to prepare design plans, applied for and obtained Veterans Administration and Federal Housing Authority loans and contracted with X-Cel Contracting to construct houses on the lots. Also in 1956, House Beautiful acquired 21 lots in the Beverly Hills Addition from Spears Development and 22 different Beverly Hills lots from Spears Construction. House Beautiful obtained loan commitments and contracted with X-Cel Contracting to construct the houses.

On March 7, 1958, Quality Spears purchased 29 lots in Rancho Santa Fe from Beverly Hills Development. The latter agreed to complete the land development by installing paving, sewer lines and water mains. Many other similar transactions transpired during the ensuing years. These specific dealings⁷ adequately illustrate the complete intermeshing of the assorted developmental projects undertaken by the petitioners under the direction of Julius Spears.

The manipulation of projects and corporations seems to have been successful in several ways not the least of which was the maintenance of each corporation's net income below the $25,000 level. Of the total of 78 corporate tax years experienced by the twelve corporations, in only 21 tax years did the net income of any corporation exceed $25,000 and in 5 of those 21 years the taxable income was less than $26,000 and greater than $30,000 in only nine tax years. Of the 57 tax years in which the taxable income was less than $25,000, it exceeded $24,000 in 10 years and $20,000 in 16 tax years. Thus, an analysis of the reported taxable income figures for the corporations controlled by Julius Spears demonstrates the remarkable consistency with which taxable income approximated $25,000 for each of the corporations involved.

The Tax Court, having considered all of the transactions among the various corporations, concluded that the principal purpose for the formation of each of the petitioners was the acquisition of additional surtax exemptions. The Commissioner's deficiency assessments were thus upheld as being clearly justified by the evidence.⁸ Accordingly, the issue presented for our consideration is one of deciding whether the Tax Court correctly determined that Julius Spears' principal purpose in organizing the various corporate petitioners was to obtain the benefit of a deduction or credit that would not otherwise have been enjoyed.⁹

The determination by the Tax Court that the corporations were organized principally to obtain multiple surtax exemptions is a finding of fact¹⁰ which is conclusive on this appeal if supported by substantial evidence and not clearly erroneous.¹¹ In addition, it is conceded that the Commissioner's assessment is presumed to be correct, i. e., the burden of showing an absence of the prohibited principal purpose is upon the taxpayer.¹² As a result, we have not found it necessary to set forth an exhaustive delineation of all of the facts nor to belabor our reasons for upholding the Tax Court's decision.

It is asserted here, as it was in the Tax Court, that the primary reasons for forming the separate corporate petitioners were: to separate the land development, design and finance, construction and sales functions of the home building industry; to limit the exposure of capital at risk by creating a separate...