Levenson v. United States, Civ. A. No. 8583
| Decision Date | 11 December 1957 |
| Docket Number | 8588,8589,8594.,Civ. A. No. 8583 |
| Citation | 157 F. Supp. 244 |
| Parties | A. E. LEVENSON and Marie Levenson, Plaintiffs, v. UNITED STATES of America, Defendant. C. A. TILLMAN, Jr., and Harriet S. Tillman, Plaintiffs, v. UNITED STATES of America, Defendant. Halford Arthur TILLMAN and Virginia B. Tillman, Plaintiffs, v. UNITED STATES of America, Defendant. A. Jesse DUKE and Martha M. Duke, Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Northern District of Alabama |
H. D. Markstein, Jr., Birmingham, Ala., for plaintiffs in cases Nos. 8583 and 8594.
Cuba, Cuba & McNatt, Atlanta, Ga., and Walter Mims, Birmingham, Ala., for plaintiffs in 8589 and 8588.
W. L. Longshore, U. S. Atty., and M. L. Tanner, Asst. U. S. Atty., Birmingham, Ala., and Charles Mehaffy, Atty. Tax Division, Dept. of Justice, Washington, D. C., for defendant.
Consolidated for purpose of trial only and, by agreement of the parties, tried to the court without the intervention of a jury, these four cases involve claims by each taxpayer1 for a refund of income taxes for the year 1954. Common to each action is the mixed question of law and fact: Was Atomic Trailer Sales Agency, Inc., a collapsible corporation within the purview of Section 117(m) of the Revenue Act of 1939? 26 U.S.C.A. § 117(m).
On June 19, 1953, E. Y. McMorries and H. A. Tillman, as partners doing business under the firm name of Continental Supply Company, entered into a contract with the Robbins Trailer Corporation, to purchase some 3,996 trailers. Contemporaneously with the execution of such contract and in compliance with its terms, Robbins made available for delivery to the purchasers only 501 trailers; they were situated at Williston, South Carolina, and were vacant at the time of the execution of the contract.
E. Y. McMorries and H. A. Tillman associated themselves under an oral agreement with other individuals, including A. J. Duke, and proceeded to do business as a partnership under the name of Atomic Trailer Sales Agency. This latter partnership accepted delivery of the 501 trailers at Williston on or about July 1, 1953, and sold them all before July 29, 1953.
On July 29, 1953, a corporation was organized under the name of Atomic Trailer Sales Agency, Inc., the stock of which corporation consisted of $1,000, all of which was paid for in cash, and was owned by the following individuals in the proportions set opposite their respective names below:
E. Y. McMorries 25
H. A. Tillman 25
Claude A. Tillman, Sr. 15
Claude A. Tillman, Jr. 5
Alfred E. Levenson 20
A. J. Duke 8
D. H. Markstein, Jr. 2
___
Total 100
On August 10, 1953, a part of the stock of said corporation was transferred, and thereafter was owned as follows:
E. Y. McMorries 24
H. A. Tillman 19
Claude A. Tillman, Sr. 15
Claude A. Tillman, Jr. 10
Alfred E. Levenson 18
A. J. Duke 8
D. M. Markstein, Jr. 4
Mrs. Bertha Behr 2
___
Total 100
On July 30, 1953, Continental Supply Company executed an assignment of all rights of the partners in and under the basic contract between Continental Supply Company and Robbins Trailer Corporation to the new Corporation, Atomic Trailer Sales Agency, Inc.2
Thereupon, on the same date, the corporation entered into an agreement with C. A. Tillman, A. E. Levenson, E. Y. McMorries and H. A. Tillman, appointing them exclusive sales agents for the sales of the trailers involved.
At the time of the assignment of such contract to the corporation, there remained undelivered 3,495 trailers. As of that date Robbins Trailer Corporation had available for delivery only a part of the trailers at Barnwell, South Carolina. The corporation commenced to sell available trailers at Barnwell on or about August 3, 1953, and continued in this activity as Robbins made trailers available from time to time. Since such trailers could be made available for delivery to the corporation only when vacated by previous occupants, Robbins made available for delivery a part of the trailers at Augusta and at Aiken at irregular intervals. By February 15, 1954, the corporation had sold a total of 1,795 trailers and had realized a net profit of $417,471.81, and, on that date, had 109 trailers on hand unsold. Except as accounted for above, Robbins had not made available for delivery any other trailers to the corporation up to that date.
On February 15, 1954, each of the plaintiffs in these consolidated cases sold all of their stock in the corporation to a group composed of Ormond Somerville, Joseph L. Ullman, Jack M. Adler and Gene L. Fies, for $763,400. This new group, on February 19, 1954, caused the corporation to be dissolved and thereafter sold the remaining 1700 trailers as a partnership.
The oral testimony of witnesses leaves the court in no doubt that both before and after the organization of the corporation the entrepreneurs, finding themselves in possession of a most favorable contract, were seeking ways and means of converting ordinary income into capital gain. For example, after the corporation was organized efforts were made by the stockholders to find a "loss" corporation. Failing in this, negotiations were had with Pioneer Finance Company looking to its taking over the stock of the corporation just as the four named individuals finally did, with the stockholders of the corporation, or some of them, retaining control of the remainder of the operation.
After the sale of the stock and the dissolution of the corporation, two of the former stockholders continued the operation, McMorries staying on the job until at least sometime in July, 1954, and Tillman until October, 1954. Their methods of operations remained unchanged; their living expenses in South Carolina were paid, as were those of their wives; and their wives continued to perform the services theretofore rendered by them to the corporation and drew salaries therefor. However, neither of them was paid commissions on the sales of trailers concluded by them after February 15, 1954.
The purchase price of the stock in the corporation to be paid by the abovenamed four individuals was fixed in such a way by contract that it was flexible and was to be adjusted to the number of trailers made available to and sold by the new partnership. Provision was made for revision downward of the purchase price if any of such trailers brought less than a stipulated amount. However, there was no provision for a revision upward upon the happening of any contingency.
To frame more accurately the respective contentions of the parties, the pertinent provisions of Section 117(m) (2) of the Revenue Act of 1939,3 interpolating, where required, the appropriate provisions of Section 117(a) (1) (A) of such Act4 are as follows:
"* * * the term `collapsible corporation' means a corporation formed or availed of principally for the * * * purchase of property which (in the hands of the corporation) is stock in trade of the corporation or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year, or property held by the corporation primarily for sale to customers in the ordinary course of its trade or business, with a view to— the sale or exchange of stock by its shareholders (whether in liquidation or otherwise) * * * prior to the realization by the corporation * * * purchasing the property of a substantial part of the net income to be derived from such property."
Plaintiff contends that the corporation was not "collapsible" for either one of two reasons, or both: First, the contract between the corporation and Robbins for the purchase of trailers, which was executory on the date of the stock sale, was a capital asset as negatively defined in Section 117(a) (1)5 of the Revenue Act of 1939 and clearly was not one of the noncapital assets expressly defined in Section 117(a) (1) (A) thereof. Second, at the time of the sale of such stock, the corporation had realized a substantial part of the net income to be derived from the performance of such contract.
With equal confidence, defendant insists that such corporation meets the definition of Section 117(m) (2) of the Revenue Act of 1939 because: First, it was formed for the purchase and resale of trailers which (in the hands of such corporation) were not capital assets as defined by Section 117(a) (1). Second, a substantial part of the net income to be derived from such trailers had not been realized at the time of the sale of such stock.
Benefited by hindsight, defendant detects in the evolution from old partnership to corporation to new partnership a scheme confected with the subjective intent of thwarting it in the collection of its just revenue, and complains, with more than a little merit, that the sale of the stock of the corporation was in effect a contract of the four new individuals, for a fixed fee, to hold the assets of the corporation in their name while the income continued to be produced by former stockholders of the corporation.
To be perfectly candid, this court is not so naive as to suppose that a tax avoidance motive did not permeate the organization of the corporation and did not play a part in, indeed if it did not dictate, the time and the manner of the sale of the stock by its stockholders. It is too late in the day for the defendant to insist that its citizens are obliged to conduct their affairs and mold their businesses so as to produce for its treasury the maximum amount in taxes.6
Notwithstanding the temptation to use as a springboard the strong impression that the partners trading as Atomic...
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