McCutchin Drilling Co. v. Commissioner of Internal Rev.
| Decision Date | 31 July 1944 |
| Docket Number | No. 10918.,10918. |
| Citation | 143 F.2d 480 |
| Parties | McCUTCHIN DRILLING CO. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Harry C. Weeks, of Fort Worth, Tex., for petitioner.
Helen R. Carloss, Sewall Key, and Helen Goodner, Sp. Assts. to the Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and Charles E. Lowery, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent.
Before SIBLEY, HUTCHESON, and LEE, Circuit Judges.
This case calls for a review of a decision of the Tax Court upholding the Commissioner's determination of a deficiency in petitioner's income tax for the taxable year ending September 30, 1940. The question before us is whether the findings of the Tax Court, resulting in the conclusion that petitioner was availed of to avoid the imposition of a surtax upon its shareholders, are supported by the evidence.
Petitioner is a Texas corporation, chartered in October of 1935, with a capital of $25,000 represented by 250 shares of stock, all of which were owned by Alex McCutchin, its president, except two qualifying shares issued, one each, to his wife and brother. McCutchin had for some years been engaged in drilling oil and gas wells under contract and in producing oil. Petitioner was organized to take over his drilling business, and immediately did so. It began business with three or four medium-light steam drilling rigs, acquired from McCutchin, and during the taxable year ending September 30, 1940, owned five rigs, three of which were steam-driven. Petitioner drilled wells for McCutchin and for other customers. Its operations for outside customers were almost entirely for cash, small payments being made as the drilling progressed with the balance payable 60 to 120 days after the well was completed. In a few instances, at a considerable advance in contract price, it drilled wells for oil payments extending as long as five years. Beginning with 1936 and extending through 1942, the number of wells per year drilled for McCutchin and for others was as follows:
Drilled for Drilled for
Year McCutchin Others Total
1936 27 45 72
1937 6 77 83
1938 14 69 83
1939 11 58 69
1940 7 35 42
Wells drilled for McCutchin were charged to him on petitioner's books. In the fiscal year ending September 30, 1940, $61,000 of a total debit of over $73,000 for drilling was entered to his account on the last day of that year. Petitioner and McCutchin often used the other's supplies, and McCutchin's account on petitioner's books was debited or credited as the occasion required. In the fiscal year in question, out of 118 such transactions 88 were transfers to McCutchin. McCutchin also borrowed from petitioner and made payments in cash to petitioner from time to time, but the amount borrowed exceeded the amount paid. While the amount due by him was available at any time if needed, McCutchin as a rule settled with petitioner at the end of the calendar year.
McCutchin and his wife, residents of Texas, filed their income tax return on a calendar-year basis, each reporting one half of their community net income. In the year 1940 this income was $68,246.25, McCutchin's share of which was sufficient, even without receiving any dividends upon the stock of the taxpayer corporation, to place McCutchin within surtax brackets.
Section 102 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 102, provides that if a corporation is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting earnings or profits to accumulate instead of dividing or distributing them, a surtax at specified rates shall be levied against it. If its earnings or profits are permitted to accumulate beyond the reasonable needs of the business, such fact, says the statute, shall be determinative of the purpose to avoid the tax unless the corporation by a clear preponderance of the evidence shall prove to the contrary.
The questions whether a corporation "is availed of for the purpose of preventing the imposition of a surtax upon its shareholders" and whether accumulated earnings or profits are beyond the reasonable needs of its business are questions of fact. The findings of the Tax Court with respect thereto are conclusive if supported by substantial evidence.1 The Tax Court has found against petitioner on both questions, and we may only inquire whether or not its findings are supported by the evidence.
As heretofore stated, petitioner was organized in 1935 with a capital of $25,000. At the beginning of the fiscal year in question it had a surplus of $277,535.02, and added $28,703.98 thereto from its earnings to make a surplus at the end of said fiscal year of $306,239. No dividends were paid in 1940 or in any prior year. It entered the fiscal year with quick assets in the sum of $120,051.60; its quick liabilities of $13,339.21, and depreciation reserves of $65,055.87, a total of $78,395.08, left a clear working capital of $41,656.32. It ended that year with quick assets in the sum of $248,989.47; its quick liabilities of $52,315.85, and depreciation reserves of $80,071.30, a total of $132,387.15, left a clear working capital of $116,602.32. The record nowhere...
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