Montgomery Coca-Cola Bottling Co., Inc. v. US

• Decision Date: 20 February 1980
• Docket Number: No. 275-73.,275-73.
• Citation: 615 F.2d 1318
• Parties: MONTGOMERY COCA-COLA BOTTLING COMPANY, INCORPORATED v. The UNITED STATES.
• Court: U.S. Claims Court

615 F.2d 1318

MONTGOMERY COCA-COLA BOTTLING COMPANY, INCORPORATED v. The UNITED STATES.

No. 275-73.

United States Court of Claims.

February 20, 1980.

M. Roland Nachman, Jr., Montgomery, Ala., attorney of record, for plaintiff; Steiner, Crum & Baker, Montgomery, Ala., of counsel.

Jay G. Philpott, Jr., Washington, D. C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D. C., for defendant; Theodore D. Peyser, Washington, D. C., of counsel.

Before DAVIS, KASHIWA and BENNETT, Judges.

OPINION

KASHIWA, Judge:

This case comes before the court on defendant's exceptions to the recommended decision of Trial Judge Wood, which was filed December 13, 1978, pursuant to Rule 134(h). We must decide whether the trial judge was correct in finding plaintiff intended to receive no payment for its franchise and, as a result, was not a personal holding company under I.R.C. §§ 541 et seq.¹ After considering the written submissions of the parties and their oral presentations, we reject the trial judge's recommended decision and hold for the defendant.

FACTS

Plaintiff is an Alabama corporation, organized in 1934, with its principal place of business in Montgomery, Alabama. During the years in issue, fiscal years ending September 30, 1965, through September 30, 1969, all of plaintiff's outstanding stock was held by two shareholders: the W. A. Bellingrath Trust (55 percent) and the Mary E. Bellingrath Trust (45 percent). These two shareholders plus income beneficiaries of the two trusts were the partners in two separate partnerships named the Coca-Cola Bottling Company of Montgomery (Montgomery partnership) and the Coca-Cola Bottling Company of Andalusia (Andalusia partnership).² Plaintiff entered into a sub-bottling contract with these partnerships.

By way of background, a first-line Coca-Cola bottler is one to which The Coca-Cola Company³ has granted the exclusive right to bottle and sell Coca-Cola and to use the trademark name "Coca-Cola" within a prescribed geographic territory. This is what is referred to as the "franchise."

Prior to 1934, W. A. Bellingrath, now deceased, obtained by contract with The Coca-Cola Company the exclusive franchise for his territory.⁴ In consideration for the rights granted him, Bellingrath agreed to purchase all Coca-Cola syrup from The Coca-Cola Company and to pay $1.30 for each gallon purchased.

On its formation in 1934, plaintiff received Bellingrath's rights to the franchise. In addition, plaintiff received real estate, a bottling plant, machinery, and fixtures. Since its inception, plaintiff never operated as an active bottling company. Rather, it leased its tangible assets and sublicensed its franchise right to bottle and sell Coca-Cola to its affiliated partnerships.

During the period 1941 through 1961, plaintiff and its two affiliated partnerships were run by one man, S. E. Elmore (Elmore). Elmore conducted the business of plaintiff and the partnerships without active participation of the stockholders or the partners.

Due to rapid changes occurring within the industry in the 1950's, Elmore was faced with a problem of acquiring enough cash to meet expected needs for new equipment. After consultation with H. J. Pratt, a partner in Ernst & Ernst, certified public accountants, which has represented the parties since 1941 or 1942, and with Paul Johnston, an attorney, a plan to obtain the needed cash was devised. The plan involved a sale of any tangible assets owned by the partnerships to the plaintiff (with plaintiff borrowing the necessary cash to finance the acquisition) followed by a lease back to the partnerships of all the assets held by the plaintiff.

On October 1, 1958, Elmore caused plaintiff to enter into sub-bottler's contracts with the Montgomery and Andalusia partnerships. Pursuant to these contracts, plaintiff conveyed its exclusive rights to bottle and sell Coca-Cola and to use the Coca-Cola trademark for a period of 10 years and 3 months. This period was later extended through December 31, 1970. In consideration therefor, the partnerships agreed to purchase all Coca-Cola syrup from plaintiff and to pay $1.50 for each gallon of syrup. The partnerships also agreed that the price per gallon would be increased to reflect any increase in the price plaintiff had to pay The Coca-Cola Company.

Each lease agreement further provided that the partnerships would pay annually (in addition to the payments specified in the sub-bottler's contracts) a sum equal to the aggregate of the amounts determined by the following formulae:

(1) 3 1/3 percent of the gross cost to plaintiff of land and buildings as of the beginning of each taxable year;

(2) 10 percent of the gross cost to plaintiff of the bottling machinery and equipment as of the beginning of each taxable year;

(3) 130 percent of the aggregate annual depreciation deductions claimed by plaintiff for federal income tax purposes on account of automobiles, delivery equipment, and coolers.

In theory, during the years in issue plaintiff purchased Coca-Cola syrup from The Coca-Cola Company at a price of $1.30 per gallon. In turn, the partnerships purchased the syrup from plaintiff at a price of $1.50 per gallon. In practice, however, the partnerships were invoiced directly by The Coca-Cola Company and the partnerships paid to plaintiff the difference: 20 cents per gallon.

On audit, the Internal Revenue Service (Service) determined that the plaintiff was a personal holding company during the years in issue and assessed the plaintiff under section 541. The Service considered plaintiff to have received personal holding company income (as defined in section 543(a)(6))⁵ in excess of 60 percent of its "adjusted ordinary gross income" (as defined in section 543(b)(2)). This was based on the Commissioner's finding that the entire 20 cents per gallon payment was a payment for the partnerships' use of plaintiff's Coca-Cola franchise and was therefore a royalty. As such, the 10 percent "test" of the second sentence of section 543(a)(6) is satisfied and all the income described in section 543(a)(6) is counted as personal holding company income for purposes of sections 541 and 542. Any amount over approximately 6 cents per gallon is the "break point" at which, under section 543(a)(6), the income is classified as personal holding company income.

Plaintiff paid the assessed deficiencies⁶ and asserted claims for refund. In each claim for refund the plaintiff posed alternative arguments. Either all the income from the partnerships was "compensation for the use of property" and, thus, not includible in the 10 percent test of section 543(a) (6); or the value of the franchise was such that there either were no payments for its use or they were so small that, together with the plaintiff's other personal holding company income, the amount was not 10 percent of plaintiff's ordinary gross income (i. e., under the break point). As such, the payments for the use of shareholder-owned property were not personal holding company income. Section 543(a)(6).

This case has twice been before this court on motions for summary judgment. By order of February 28, 1975, 206 Ct.Cl. 864 (1975), we held that "royalties" as classified in section 543(a)(1), and defined in Treas.Reg. § 1.543-1(b)(3), include "amounts received for the privilege of using patents, copyrights, secret processes and formulae, goodwill, trademarks, trade brands, franchises, and other like property." Additionally, we held that to the extent any payments under the sub-bottler's contracts and leases are royalties as within the meaning of section 543(a)(1) and Treas.Reg. § 1.543-1(b)(3), they are personal holding company income for purposes of the 10 percent test of section 543(a)(6).⁷ In our order we also held that "it is apparent that some part of the gallonage payments made under the sub-bottler's contracts was in exchange for plaintiff's franchise rights." 206 Ct.Cl. at 866. Further, we remanded the case to the trial judge, ordering him to determine whether "the amount of gallonage payments that are properly allocable or attributable to the use of plaintiff's franchise was five cents per gallon or twenty cents per gallon; * * *."⁸Id.

Defendant filed another motion for summary judgment, requesting a determination of the amount of the royalty based on the documents before the court, relying on Commissioner v. Danielson, 378 F.2d 771 (3d Cir.1967), cert. denied, 389 U.S. 858, 88 S.Ct. 94, 19 L.Ed.2d 123 (1967). This motion was denied because plaintiff did not expressly set out the 20 cents per gallon as a "royalty" and, therefore, was not bound under the Danielson rule as a matter of law to 20 cents per gallon as a royalty. 208 Ct.Cl. 950 (1975).

The trial judge ruled that the 20 cents per gallon payment from the partnerships to plaintiff "was intended solely as a partial payment to plaintiff for the use of plaintiff's tangible assets by the respective partnerships, not as a payment to plaintiff for the use by the respective partnerships of plaintiff's franchise." The trial judge thus found the proper amount of the gallonage payment attributable to the use of plaintiff's franchise was neither 5 nor 20 cents but, rather, zero. As a result, plaintiff had no personal holding company income under section 543(a)(6) and was not a personal holding company.

I. Appellate Review

In this review of the trial judge's report, we take note of our Rule 147(b) and case law which state that the findings of fact made by the trial judge are presumptively correct. Commerce International Co. v. United States, 338 F.2d 81, 167 Ct.Cl. 529 (1964); Davis v. United States, 164 Ct.Cl. 612 (1964).

While we agree the report of a trial judge is entitled to much consideration, that does not impair nor dilute our duty of bearing the ultimate responsibility for determining matters before us. If we are convinced that the preponderance of the evidence goes against the determination of the trial judge, we are obliged...