Loftin and Woodard, Inc. v. U.S.

• Decision Date: 09 August 1978
• Docket Number: No. 76-1839,76-1839
• Citation: 577 F.2d 1206
• Parties: 78-2 USTC P 9645 LOFTIN AND WOODARD, INC., K. C. Loftin and Marie Loftin, E. A. Woodard and Virginia Woodard, Plaintiffs-Appellants, Cross-Appellees, v. UNITED STATES of America, Defendant-Appellee, Cross-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1206

577 F.2d 1206

78-2 USTC P 9645

LOFTIN AND WOODARD, INC., K. C. Loftin and Marie Loftin, E.

A. Woodard and Virginia Woodard, Plaintiffs-Appellants, Cross-Appellees, v. UNITED STATES of America, Defendant-Appellee, Cross-Appellant.

No. 76-1839.

United States Court of Appeals, Fifth Circuit.

Aug. 9, 1978.

Paul K. Kirkpatrick, Jr., Monroe, La., for plaintiffs-appellants cross-appellees.

Donald E. Walter, U. S. Atty., Lawrence L. Jones, Asst. U. S. Atty., Shreveport, La., Myron C. Baum, Acting Asst. Atty. Gen., Michael L. Paup, Joseph L. Liegl, Attys., Tax Div., U. S. Dept. of Justice, Gilbert E. Andrews, Acting Chief, Appellate Section, U. S. Dept. of Justice, Washington, D. C., for the U. S.

Appeals from the United States District Court for the Western District of Louisiana.

Before COLEMAN and FAY, Circuit Judges, and KING, District Judge. ^*

JAMES LAWRENCE KING, District Judge.

Taxpayers appeal the decision of the district court in which deficiencies were assessed

against them, after a full trial, ¹ as follows:

(i) against the Loftin and Woodard Corporation for fiscal years 1963, 1964 and 1966;

(ii) against K. C. and Marie Loftin, as joint taxpayers, for calendar years 1962, 1963 and 1964; and

(iii) against E. A. and Virginia Woodard, as joint taxpayers, for calendar years 1963 and 1964. ²

In addition, the district court found Loftin liable for fraud as to tax years 1963 and 1964.

At the same time, we are confronted with a cross-appeal lodged by the Government. In essence, the Government asserts that the district court's failure to find fraud as to the Loftin & Woodard Corporation was incorrect. Further, the cross-appeal focuses on the district court's decision not to utilize a late filing penalty to diminish the refund found to be owing to the corporation on the basis of an audit of its 1961 return.

I. THE FACTUAL BACKGROUND:

The factual context of this case is quite complex.

We have before us three sets of taxpayers: K.C. and Marie Loftin (hereafter "Loftin"); E.A. and Virginia Woodard (hereafter "Woodard"); and the Loftin and Woodard Corporation (hereafter the "Corporation"). The Loftins filed a joint return on a calendar year accounting basis, as did the Woodards. The Corporation filed its return on a fiscal year interval beginning on June 1 of each year.

Loftin and Woodard were the sole stockholders of the Corporation. K.C. Loftin owned a 65% interest. The remaining 35% was under Woodard's control. The Corporation was created primarily for the purpose of clearing land. It was this task to which it turned most of its efforts in the tax years at issue on this appeal that is, 1961-1967.

The central transaction in this appeal involves the purchase by the Corporation of over nine thousand acres of wooded land in Yazoo County, Mississippi on April 17, 1963. Prior to the corporate purchase, Loftin and Woodard contemplated the formation of a partnership for the consummation of the transaction. However, because the partnership would have been unable to secure adequate funds in the requisite period of time, the would-be partners decided that the Corporation would have to serve as the purchasing entity. ³ On April 17, the Corporation secured title to the first six thousand acres of the Yazoo property at a cost of $225,542.30. ⁴ Prior to the closing, the Corporation adopted a resolution emphasizing its intention to sell the land to the partnership once the partnership secured the requisite funds. ⁵ The transfer eventually occurred It is significant that prior to the November 1 transfer, the Corporation began its clearing operation on the property. These operations were performed pursuant to the authorization of the partnership. Although no actual clearing was done prior to November 1, the Corporation did repair several structures already on the land; clear boundary lines; and establish further drainage facilities, all in preparation for the eventual clearing operation. In fact, no land was cleared in fiscal year 1963. ⁶ By the end of fiscal year 1964, eight hundred acres of the Yazoo land had been cleared. By 1967, over nine thousand, six hundred acres were cleared.

on November 1, 1963 almost five months after the Corporation's purchase. At this time, the partnership paid the Corporation the amount that the latter entity had paid on April 17.

In arriving at a more complete understanding of the nature of this land clearing operation, one must understand the manner in which the taxpayers reflected it on paper.

It is uncontested that the expenses incurred in the initial stages of the operation that is, from April 17, 1963 to May 31, 1964 (the end of fiscal 1964) were not registered in a separately labeled category on the corporate ledger. Instead, these expenses were spread among some of the other corporate expense accounts in existence at that time. It was not until the end of the corporate fiscal year 1965, when 5,700 acres had been cleared, that the corporate ledger carried a separate category for Yazoo related expenses.

The record of payments made by the partnership is equally ambiguous in the early stages of the clearing operation. The partnership ledger reflects a payment to the Corporation on the final day of the partnership's tax year, December 31, 1964. ⁷ Payments by the partnership to the Corporation were consummated on paper by the entry of credits to an account receivable due from the Corporation. ⁸

The remainder of the 9,620 acres within the control of the partnership by May 31, 1967 was cleared in fiscal 1966 and 1967. Thus, payments for the land clearing operation progressed, on paper, as follows: ⁹ Credits entered in the partnership account receivable theoretically reflected payments made by the partnership to the Corporation. Receipt of those payments by the Corporation was reflected by a debit to its account payable. As is apparent on the face of these transactions, the Corporation habitually made its entries on the final day of its respective tax year and the partnership did likewise. The one exception to this habit, the corporate entry on December 31, 1965, was occasioned ostensibly by a desire to equalize the recordation of payments made and received up to and including that date. ¹⁰

At the same time that the payments for these operations were being recorded, the Corporation incurred expenses that exceeded, in toto, the payments made.

This, then, is the material from which the district court fashioned the constructive dividend contested herein. The district court, after an extensive trial, decided that a constructive dividend accrued to Loftin and to Woodard on the basis of the work performed by the Corporation for the partnership. The unreported income embodied in the constructive dividend finding formed the core of the deficiency asserted by the district court against both taxpayers for 1963, 1964 and 1966.

At the same time, the lower court decided that several expenditures made by the Corporation on behalf of Loftin and Woodard were not business related and were, therefore, also in the nature of constructive dividends. These other expenses centered on trips taken by the taxpayers; advances received by them; and the payment of personal insurance premiums, political campaign expenses, and football tickets by the Corporation for Loftin and/or Woodard. The taxability of these items in terms of the constructive dividend question is not on appeal. However, their relationship to the finding of fraud made as to taxpayer Loftin is hotly contested and is the subject of Section III, infra.

Finally, there is one further aspect of the land clearing operation with which we must concern ourselves on this appeal the expenses incurred by the Corporation. While this issue is at the core of the constructive dividend question, it poses an additional problem for our consideration. The district court found that the corporate expenses incurred in the land clearing operation were, for the most part, non-deductible as ordinary and necessary business expenses. The ultimate resolution of this issue is highly dependent upon the determinations we make with regard to the constructive dividend issue.

The only other issue with which we are confronted on this appeal does not stem from the land clearing operation. As will be discussed in greater detail in a later portion of this opinion, this final matter is related to an audit of the Corporate return filed for 1961.

In sum, we are confronted with a factual context which may be viewed from a tripartite perspective. First, there is the relationship of the land clearing operation to the issue of a constructive dividend. Second, there is the relationship of the land clearing operation to the corporate decision to deduct expenses arising therefrom. And third, there is the relationship of (i) the constructive dividend, found to have arisen from the land clearing operation, along with the corporate payment of several expenses incurred by the taxpayers to (ii) the intent of the taxpayers in not declaring these payments as income. An additional issue, unrelated to the above, centers on the Corporation's 1961 return.

This is a complex case, admitting of no simple answers. An excellent trial record, along with lengthy and effective appellate briefs and argument have made our task much easier. The record clearly reflects that Judge Hunter diligently and relentlessly pursued the clarification of this factual ticket. ¹¹ In the end, we are "mere mortals unendowed with cosmic tax wisdom(. W)e have performed our task as well as our fallible mentalities and compositions will permit." Cornelius v. Commissioner of Internal Revenue, 494 F.2d 465, 472 (5th Cir. 1974).

1107 pages of record; 264 pages of briefs; and almost two hours of oral argument later, these are our conclusions.

II. THE CONSTRUCTIVE DIVIDEND ISSUE:

When a corporation confers an economic benefit upon a shareholder, in his capacity as such, without an expectation of reimbursement, that...