Kurzner v. United States
| Decision Date | 27 May 1969 |
| Docket Number | No. 26656.,26656. |
| Citation | 413 F.2d 97 |
| Parties | Howard A. KURZNER and C. A. Kurzner, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
William A. Meadows, Jr., U. S. Atty., Miami, Fla., Mitchell Rogovin, Asst. Atty. Gen., Meyer Rothwacks, Lee A. Jackson, Lester B. Snyder, Attys., Tax Div., U. S. Dept. of Justice, Washington, D. C., for appellant; Robert L. Stever, Asst. U. S. Atty., of counsel.
Cyrus A. Neuman, Miami, Fla., Felix, Kniskern, Neuman & Rees, Miami, Fla., for appellees.
Charles L. Ruffner, Miami, Fla., Thomas H. Crawford, Jr., Jacksonville, Fla., amicus curiae.
Before JOHN R. BROWN, Chief Judge, and GEWIN and GOLDBERG, Circuit Judges.
The appellee-taxpayer, Dr. Howard A. Kurzner,1 is a shareholder and an employee of Gregory Orthopedic Associates, P.A. (hereinafter referred to as GOAPA), an entity organized pursuant to Florida's new Professional Service Corporation Act.2 He brought suit in the United States District Court for the Southern District of Florida, 286 F.Supp. 839, alleging that the Commissioner of Internal Revenue had assessed and collected from him unlawful and excessive income taxes for the respective taxable years ended August 31 of 1964 and 1965. In accordance with Revenue Procedure 65-27, the Government did not contest the claim for the 1964 taxable year.3 With regard to the 1965 claim, however, the Government contended that GOAPA was a partnership for federal tax purposes and that Dr. Kurzner was a fifty-percent partner; therefore, it argued, a fifty-percent interest in the partnership was properly attributable to him. The sole question before the district court was whether GOAPA was a corporation within the meaning of subsection 7701(a) (3) of the Internal Revenue Code of 1954. The court, sitting without a jury, answered in the affirmative. The same issue is now before this court on a factually undisputed record and copious briefs submitted by the parties and the Florida Bar as amicus curiae. We affirm the judgment of the district court.
Although the background facts concerning the formation and operation of GOAPA are only peripherally relevant,4 they do place the controversy in context. On September 13, 1961, Dr. Ledford Gerald Gregory, a duly licensed orthopedic surgeon practicing in Dade County, Florida, formed GOAPA for the purpose of acquiring all the assets and liabilities of his medical practice. GOAPA issued fifty shares of stock; Dr. Gregory received forty-eight shares and Drs. Burton Travis and Bernard Halperin, both Dade County physicians, received one share each. Neither of the latter physicians has ever been an employee of GOAPA and neither contributed any capital for his share. In fact, the shares were issued to them under the belief that at least three members of the board of directors had to be shareholders.5 The three original shareholders were the original officers and directors: Dr. Gregory was president; Dr. Travis was vice-president; and Dr. Halperin was secretary.
On June 1, 1961, GOAPA entered into an employment contract with Dr. Kurzner covering a period of four and three-quarter years.6 At the same time, Drs. Gregory and Kurzner entered into a buy-and-sell agreement which, among other things, granted the latter an option to purchase twenty-four shares from the former over a three-year period. Subsequently, Dr. Kurzner acquired Dr. Travis' single share of stock and then resold it to one Dr. Ronald Shallow. In December 1962, Dr. Kurzner replaced Dr. Travis as director and vice-president and has continued to serve in those offices.
The amount of the two professional employees' salaries is provided in their respective employment contracts; the amount of bonuses is determined by the board of directors but, in the past, bonuses have been made in accordance with the ratio of stock held by the employee. GOAPA operates out of two separate offices in Dade County, with the two physicians alternating between the offices. One office has three nonprofessional employees and the other has two.
The board of directors has held regular meetings, both weekly and annually, and has occasionally held a special meeting. The minutes of the meetings were taken in writing and are included in the record before this court. In addition to the business of medical practice, GOAPA has borrowed money on a promissory note and entered into a lease agreement without individual indorsement. It has also established a pension plan for its employees. Moreover, it has filed withholding statements on its employees' income taxes, annual corporate income tax returns, and quarterly Social Security tax returns.
Whether or not GOAPA has "centralized management," its offices are most certainly centrally operated. All stationery used by it bears its name. It maintains a bank account from which all disbursements relating to its business are made and its accounting records are centralized in its name. All bills are issued in its name and all payments are made directly to it. The doctor-employees receive no direct fees and no separate record is kept of the number of patients treated by a particular doctor.
Theoretically this case can be disposed of by defining the term corporation and then applying the definition to the entity involved here. The fact is, however, that the statutory "definition" of the term is a mere label; moreover, while the Supreme Court shed some light on the term in the early case of Morrissey v. Commissioner of Internal Revenue,7 the guidelines given are somewhat imprecise and, consequently, fine distinctions are difficult to make. The only contribution made by the Internal Revenue Code of 1954 to the semantical quandary is the following: "The term `corporation' includes associations, joint-stock companies, and insurance companies."8 In the Morrissey case, the Court held that a business trust must be taxed as a corporation because the following factors made it "analogous to a corporate organization": (1) it held title to the business property; (2) it furnished the opportunity for centralized management; (3) it was secure from termination or interruption by the death of owners of beneficial interests; (4) it permitted the transfer of beneficial interests without affecting the continuity of the enterprise; and (5) it permitted the limitation of personal liability of participants in the undertaking.9
The absence of a statutory definition appears to be a pernicious legacy of a bygone era of federal taxation. The label-definition approach is a carry-over from a time when the rustic simplicity of the label "corporation" was sufficient. The "definition" is virtually unchanged from that given in the Revenue Act of 1918: "the term `corporation' includes associations, joint-stock companies * * *."10 The term "partnership" was not defined until the Revenue Act of 1932, which enunciated the set of labels found in the 1954 Code.11 As one commentator has observed: "It may reasonably be assumed that Congress had little doubt that local law labels would suffice."12 And, indeed, for a time they did suffice well enough. From the first viable federal income tax laws,13 the privilege of doing business in corporate form — i. e., as an entity organized under state corporation laws — brought a heavier income tax burden than operating in a noncorporate form.14 The specter of the "double tax" — the tax on income in the hands of the corporation and on dividends in the hands of shareholders — generally ensured that anyone who sought to incorporate was impelled by legitimate economic factors. Moreover, even in closely held businesses where the double-tax scare was less acute — because of the feasibility of drawing off the bulk of taxable income through salaries — incorporation was certainly no avenue to income tax savings. The state label of "corporation" was adequate because it imported incidents of real economic significance; any enterprise to which the benefits of corporateness were not sufficient to overbalance the tax aspects simply would not incorporate.
The approach of the Government in these circumstances was to endeavor to apply the corporate tax laws to any business entity which attempted to obtain the benefits of the corporate form without assuming the corporate label. Thus, in the Morrissey case,15 the apparently tax-inspired entrepreneurs put a business enterprise in a trust but tried to operate as much as possible like a corporation. The Supreme Court found the corporate resemblance close enough and upheld the Commissioner's determination that the trust was a corporation for federal tax purposes. Thus, the Commissioner succeeded in rendering the concept of a corporation sufficiently flexible to thwart the avoidance of corporate taxes by the mere failure to incorporate. Indeed, a subsequent victory arguably stretched the concept beyond the point of flexibility.16
While the Commissioner was busily drawing ostensibly noncorporate entities into the corporate ring, changes in the revenue laws were opening new doors to tax savings which, in some instances, could be very favorable. Since the so-called double tax can be more theoretical than real in owner-operated businesses, the enactment of provisions permitting additional tax benefits to corporations would constitute positive attractions to incorporation. In the context of the present case, probably the most important innovations were the acts authorizing corporations to set up profit-sharing and pension plans on a favorable tax basis.17 At some point in time, the cat peeped out of the fog: tax advisors began to realize that, for some proprietors, the corporate tax laws were more advantageous than those applicable to noncorporate entities. Thus, in United States v. Kintner,18 a group of doctors which had operated as a partnership adopted articles of association which appear to have been designed to reflect the incidents of corporateness...
To continue reading
Request your trial
-
Larson v. Comm'r of Internal Revenue
...have considered them. See Zuckman v. United States, 524 F.2d 729 (Ct.Cl. 1975); Outlaw v. United States, supra; Kurzner v. United States, 413 F.2d 97, 105 (5th Cir. 1969) (‘four equally weighted procrustean criteria’); secs. 301.7701-2(a) (3) and 301.7701-3(b)(2), Proced. & Admin. Regs., ex......
-
Eastern Kentucky Welfare Rights Organization v. Simon
...368 U.S. 898, 82 S.Ct. 177, 7 L.Ed.2d 94 (1961); Kern v. Granquist, 291 F.2d 29, 32 (9th Cir. 1961). Compare Kurzner v. United States, 413 F.2d 97, 112 (5th Cir. 1969) with O'Neill v. United States, 410 F.2d 888 (6th Cir. 1969).34 At 1290.35 See also NLRB v. Wyman-Gordon Co., 394 U.S. 759, ......
-
Rost v. United States
...of the personal liability of participants." Comm'r v. Rector & Davidson , 111 F.2d 332, 333 (5th Cir. 1940) ; see Kurzner v. Comm'r , 413 F.2d 97, 101–04 & n.22 (5th Cir. 1969) (reviewing Morrissey 's discussion of "distinguishing attributes of ‘corporateness’ ").6 See also Abraham v. Unite......
-
Richlands Medical Association v. Commissioner
...association acts to confer corporate status under the Kintner regulations." Kurzner v. United States [69-1 USTC ¶ 9428], 413 F.2d 97, 109 (5th Cir. 1969). The 1965 Regulations, which were contained primarily in former section 301.7701-2(h), Proced. and Admin. Regs. (entitled "classification......
-
Unreasonable compensation for employee-stockholders of a professional corporation: it is not an unreasonable proposition.
...6h Cir., at 49-2 USTC 13,298. [20] Howard A. Kurzner, 286 F Supp 839 (S.D. Fla. 1968) (22 AFTR2d 5197, 68-2 USTC [paragraph]9514), aff'd, 413 F2d 97 (5th Cir. 1969)(23 AFTR2d 691482, 69-1 USTC [paragraph]9428); 5th Cir., at 69-1 USTC [21] IRM 57(16)0 731. [22] See the Rutter cases, notes 6 ......