Motor Fuel Carriers, Inc. v. United States
| Decision Date | 15 February 1962 |
| Docket Number | No. 496.,496. |
| Citation | 202 F. Supp. 497 |
| Parties | MOTOR FUEL CARRIERS, INC., Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Northern District of Florida |
Wm. R. Frazier, Hill & Frazier, Jacksonville, Fla., for plaintiff.
Garry A. Pearson, Tax Division, Dept. of Justice, Washington, D. C., and Varn, U. S. Atty., Tallahassee, Fla., for defendant.
This action was instituted by the taxpayer to recover the following amounts, which it paid as income taxes, accumulated earnings taxes and interest for the calendar years 1956 and 1957:
Accumulated
Income Tax Earnings
Year Deficiency Tax Deficiency Interest Total
1956 $621.45 $19,011.44 $2,384.99 $22,017.88
1957 $429.18 $21,492.12 $1,347.71 $23,269.01
__________
$45,286.89
The taxpayer is a Florida Corporation, all of whose stock was purchased by John S. Espy in 1946. At the time of the purchase, the taxpayer had no assets other than State and Interstate Commerce Commission certificates authorizing the transportation of petroleum products in Florida, Alabama and Georgia.
The Commissioner of Internal Revenue in auditing the taxpayer's returns for 1956 and 1957 determined that the corporation had unreasonably accumulated its earnings for those years and imposed the surtax provided for in Section 531 of the Internal Revenue Code of 1954, 26 U.S.C. § 531.1 The corporation paid the additional taxes as assessed and filed claims for refund. The claims were disallowed.
At the end of 1956 the corporation had accumulated surplus in the amount of $389,411. At the end of 1957 the surplus accumulated was $462,210. In the year 1956 the corporation had gross receipts of $1,312,655.16 and taxable income of $160,025.50. In the year 1957 it had gross receipts in the amount of $1,385,873.78 and taxable income of $154,700.74.
In the year 1956 the corporation had a net profit in the amount of $85,570 and in 1957 a net profit of $83,875. All figures herein set forth, while subject to minor controversy with respect to adjustments, are substantially correct and will be taken by the Court as the final figures subject to later correction on motion of either of the parties.
During the year 1956 the corporation paid a dividend of $20,000 to its stockholders, over $19,000 of which went to Mr. Espy personally. No dividend was declared or paid in 1957 nor had any other dividends been declared or paid prior to that time or since.
An average cash balance of $250,000 was maintained during 1956 and 1957 in the Bay National Bank, Panama City, Florida. During the same period, an average balance of $74,000 was maintained in the Florida National Bank in Jacksonville, Florida. Other bank accounts carried an average of $25,500, making an aggregate cash on hand approximately $350,000.
The taxpayer relied principally upon the testimony of Mr. Espy, the President and majority stockholder, to prove that the earnings and profits were not unreasonably accumulated. He stated as justification for accumulation that among other things the corporation was planning to construct a terminal building.
The evidence shows that on April 3, 1954, the Company's Board of Directors met to consider the advisability of a proposal for the purchase of waterfront property for this purpose. On January 3, 1956, the minutes of the Board of Directors reflect that the purchase of 10 acres of waterfront property was authorized. On May 21, 1956, at the cost of $10.075 10 acres of waterfront land was purchased. From the date of the purchase on May 21, 1956, until December 1, 1960, although Espy states that expenses were incurred for improvements made to the property during the earlier part of 1960, such expenditures were not capitalized on the books of the corporation until December 1, 1960. All expenditures other than the purchase of the land were incurred several months after the corporation instituted this suit on July 18, 1960, and all but $12,000 of expenses were incurred within six months of the trial.
The total cost of the terminal building was to be $288,962.50. The plans submitted as evidence of the proposed construction were dated August 1, 1961, more than a year after suit was instituted. It does not appear that any substantial steps were taken by the taxpayer toward development of the waterfront property in the years 1956 and 1957.
The Court also finds that in the years 1956 and 1957 the plans for the future use of the accumulation were not in existence nor were they specific or definite. The resolution of 1954 was merely a statement considering the advisability of a proposal for purchasing waterfront property to build a terminal.
The record shows that on March 7, 1958, Espy stated that he wished to lease a site for a petroleum terminal to an oil company rather than to build the terminal himself. At an informal conference, which was held in 1959 at which the Government agent was attempting to determine the justification for the accumulation, Espy made no mention of the oil terminal as justification for the accumulated earnings.
The Court, therefore, finds that there being no specific or definite plan in existence that the taxpayer could not reasonably anticipate the needs of the business with respect to the oil terminal.
The evidence shows that taxpayer's business was seasonable and that there was greater demand for certain of its products at one time of the year than at another. The company's volume of traffic is not predictable, but spasmodic and irregular. Espy also stated that the retention of the surplus in 1956 and 1957 was necessary in order to meet contingencies which might necessitate more rolling stock at one time of the year than at another. He stated that it was required to have a surplus of trucks and tank cars on hand and to have adequate working capital to be able to purchase additional equipment on short notice. He testified further that the business was highly competitive and that in order to meet the competition, the corporation was required to purchase larger trucks and tank cars in order to carry more fuel and petroleum products at less operating cost.
The corporation's records show that most of its equipment was financed through lending institutions and that although a considerable portion of its expense was incurred in satisfying notes relative to the financing of the equipment, the evidence does not support taxpayer's assertion that accumulations for this purpose were reasonable. The purchase of equipment with greater carrying capacity would of necessity result in the ability of the corporation to transport larger quantities of petroleum products and, therefore, its expenses would be reduced accordingly.
The Court is unable to sustain the corporation's contention that competition from the railroads or pipe line carriers or other jobbers necessitated so great an accumulation of surplus. Equipment leased by Mr. Espy and others to the taxpayer was available for use by the taxpayer as the need arose. In view of taxpayer's history of financing equipment, the need for so great a surplus for their immediate or reasonably anticipated needs is not convincing.
While it is not relevant to the determination that the surplus of the corporation was unreasonably accumulated for the years 1956 and 1957, for the purpose of clarifying its financial status, the following earnings for the years 1958 through 1960 are herein set forth:
Current
Taxable Income Earnings
Year Income Tax Retained
1958 $176,549.02 $ 83,374.02 $ 93,175.00
1959 265,036.77 130,670.41 134,366.36
1960 193,706.40 92,945.83 100,760.57
___________ ___________ ___________
Total $635,292.19 $306,990.26 $328,301.93
Added to the surplus accumulated through 1957, the current earnings retained for...
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