Mains v. United States
| Decision Date | 15 January 1974 |
| Docket Number | Civ. A. No. 71-126,71-127. |
| Citation | 372 F. Supp. 1093 |
| Parties | Donald L. MAINS and Joyce G. Mains, Plaintiffs, v. UNITED STATES of America, Defendant. F. E. GOODING, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Southern District of Ohio |
COPYRIGHT MATERIAL OMITTED
H. Thompson Nicholas, Jr., Cincinnati, Ohio, Bruce W. Powell, Powell, Powell & Weimer, Columbus, Ohio, for plaintiffs.
William W. Milligan, U. S. Atty., Columbus, Ohio, Roger P. Thomasch, Thomas R. Wechter, Tax Div., U. S. Dept. of Justice, Washington, D. C., for defendant.
Plaintiffs in these consolidated actions seek refunds totaling $113,603.65 in federal income taxes for the year 1966 and statutory interest.
This matter is before the Court on the complaints filed by the plaintiffs Floyd Gooding, Donald L. Mains and Joyce G. Mains, the answer filed by the defendant and briefs of the parties.
This action was commenced under the provisions of Title 26, United States Code, Section 7422. The Court has jurisdiction over the subject matter of this action under the provisions of Title 28, United States Code, Section 1346. This matter was tried to the Court.
Plaintiffs contend that certain distributions received by them in 1966 as stockholders of the Gooding Amusement Company, Inc. and Thrills Unlimited, Inc. qualified as amounts received as the result of a partial liquidation pursuant to Section 346 of the Internal Revenue Code, and were therefore taxable at the capital gains rate. The government denied that the transactions in question qualified as partial liquidations and contends that the distributions were taxable as ordinary dividend income.
Pursuant to Rule 52 of the Federal Rules of Civil Procedure, the Court makes the following findings of fact and conclusions of law.
1. Plaintiff Floyd E. Gooding was the owner of 64.3 percent of the stock of the Gooding Amusement Company, Inc. He also owned 60 percent of the stock of Thrills Unlimited, Inc. In addition to being the controlling stockholder of both corporations, Gooding was also the chief operating officer of both corporations. Gooding died on August 14, 1972 and his estate has been substituted as a party to this action.
2. Plaintiff Joyce G. Mains is the daughter of Floyd Gooding. She owned 16.6 percent of the stock of Gooding Amusement and 35.7 percent of the stock of Thrills Unlimited during the tax year in question.
3. Gooding Amusement was engaged in the carnival business. The company was incorporated in 1946 but it had been operating as a partnership or proprietorship since the early 1930's. The company would contract with various fairs, expositions and shows to provide rides, entertainment and concessions. Each contract would provide for a specified playing date or dates at that particular event. The company had approximately 180 such contracts located primarily in the midwest.
4. For operational purposes, Gooding Amusemenet was divided into ten field units during the April to November carnival season. Each unit covered a designated route. A route consisted of a series of fairs or carnivals at which Gooding Amusement had obtained a contract. This organizational arrangement enabled the company to operate at several different locations on the same day. The units were interchangeable in that personnel and equipment were transferred from unit to unit as the need arose and occasionally several units combined to play a large event.
5. While Gooding Amusement did have ten operational field units, all important management functions were performed at the headquarters of the company in Columbus, Ohio. This home office paid the privilege deposits1 for each unit, bought most of the tickets and advertising for all of the units, kept the books of account and payroll records for all of the units, purchased all of the company equipment and negotiated most of the contracts. During the winter months all of the equipment from each of the units was stored in a common area. The expenses of repair and storage were not allocated to each unit. Finally, the company did not separately determine the profit or loss of each individual unit and it did not prorate its home office expenses among the ten units.
6. Thrills Unlimited was incorporated in 1957. The company was organized to hold title to some of the larger and therefore potentially more dangerous rides used by Gooding Amusement. Thrills would "book on" or lease these rides to Gooding Amusement in exchange for a percentage of the gross receipts received from their operation. The essential management operations of Thrills were performed at the company headquarters. Thrills did not keep separate records for each ride.
7. By far the most profitable of the ten operational units of Gooding Amusement was unit 3. This unit was referred to internally as the "Southern Route" and advertised as "Gooding's Million Dollar Midway." The Southern Route would commence operations in August in Pennsylvania and play at several large fairs located primarily in the south until the end of its season in early November. Prior to August, unit 3 would participate in playing several other dates consisting primarily of shopping centers and church bazaars that were part of other routes. The general manager, permanent employees and equipment of the Southern Route would join this unit in August.
8. Gooding Amusement first acquired contracts in the south in 1952 after it hired Hal Eifort as a general manager. Eifort brought with him several contracts in the south. Gooding provided Eifort with a nucleus of five rides which Eifort used on the Southern Route. Over the years other contracts were added to the original ones and some contracts were lost to competitors. However, in comparison to the other nine routes, the playing dates on the Southern Route remained more or less the same from year to year.
9. During the period August 1, 1965 through July 31, 1966 the Southern Route grossed $1,219,684.73, or 38.65 percent of Gooding Amusement's total gross income of $3,155,522.68. However, it also produced 47.91 percent of the company's expenses. The Southern Route had an average daily gross of $14,520.05 while the remaining routes had an average daily gross of $1,585.48. The Southern Route had only 84 playing days while the other nine routes had a total of 1221 playing days.
10. The degree of independence enjoyed by the Southern Route prior to 1966 is disputed by the parties.2 However, the Southern Route was insured under the same insurance policy as the rest of the company and all business records and profits were ultimately sent to the home office of Gooding Amusement. The Southern Route used the Gooding Amusement bank account in Columbus. In addition, as noted above, Gooding Amusement did not keep separate records for any unit. Eifort did have almost complete control over the day to day operations of his unit while he was traveling his route. Apparently other route managers had similar control but, since most of the other routes were located in the midwest, Gooding took a much more active role in supervising their operations as compared to the operations of the Southern Route. Gooding also believed that Eifort was experienced enough to manage the route without active supervision.
11. Each route including the Southern Route had a small nucleus of rides and personnel. Gooding Amusement also had a small permanent management staff in Columbus. The remainder of the company employees were basically transients who were hired by each unit as the need arose. In addition, even though Gooding Amusement owned over one hundred rides divided among the ten units, each unit would frequently "book on" or lease other rides as the need arose.
12. The Southern Route apparently had more permanent employees than any of the other routes. In fact, many of these employees were employed during the off season by another corporation controlled by Gooding. However, this unit also hired temporary employees as the need arose or leased additional rides.
13. As noted above, rides and personnel were frequently shifted from unit to unit. However, the Southern Route had some large equipment that was used exclusively by it. In addition, the small permanent staff of the Southern Route apparently did not work with any other unit.
14. Gooding had a heart attack in 1964. As a result, Gooding decided to sell both Gooding Amusement and Thrills. On March 16, 1966 Gooding entered into an agreement to sell the Southern Route to a group headed by Milton Kaufman. On April 5, 1966 both Thrills and Gooding Amusement adopted plans of complete liquidation pursuant to Section 337 of the Internal Revenue Code. The next day, Gooding Amusement signed a contract to sell the Southern Route to Gooding's Million Dollar Midway, Inc., a Delaware corporation whose principal was Milton Kaufman, for $350,000.00.3 At the same time, Thrills signed a contract to sell a "Mad Mouse" ride to the same corporation for $25,000.00. The "Mad Mouse" ride had never been used by the Southern Route prior to the sale. After the sale was completed, $363.632.66 was distributed to the shareholders of both corporations.
15. Eifort played a key role in arranging the sale. As part of the deal, he and the permanent staff of the Southern Route left Gooding Amusement to work for the new corporation. Gooding became Chairman of the Board of Directors of the new corporation.
16. The assets sold by Gooding Amusement represented only 5.19 percent of the total net worth of the company. The assets sold by Thrills represented only 1.41 percent of its total net worth. At the time of the sale, Gooding Amusement had undistributed profits or earned surplus of $1,335,000.00. However, during the year of the sale, the company paid cash dividends totalling only $8,540.00 to its shareholders in addition to the distribution made as a result of the sale. Similarly, Thrills had...
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