O'NEILL v. United States

• Decision Date: 01 May 1969
• Docket Number: No. 18714.,18714.
• Citation: 410 F.2d 888
• Parties: Hugh A. O'NEILL and Elizabeth O'Neill, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

410 F.2d 888 (1969)

Hugh A. O'NEILL and Elizabeth O'Neill, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

No. 18714.

United States Court of Appeals Sixth Circuit.

May 1, 1969.

Lester B. Snyder, Dept. of Justice, Washington, D. C., for appellant; Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Meyer Rothwacks, Attys., Dept. of Justice, Washington, D. C., on brief, Bernard Stuplinski, U. S. Atty., Carl H. Miller, Asst. U. S. Atty., Cleveland, Ohio, of counsel.

W. Dean Hopkins, Cleveland, Ohio, for appellees; H. Guy Hardy, Bert W. Moyar, McDonald, Hopkins, Hardy & Hollington, Cleveland, Ohio, on brief.

Jule M. Hannaford and Dorsey, Marquart, Windhorst, West & Halladay, Minneapolis, Minn., on brief as amicus curiae for Medical Group Management Assn.

Before O'SULLIVAN and PHILLIPS, Circuit Judges, and McALLISTER, Senior Circuit Judge.

HARRY PHILLIPS, Circuit Judge.

The central question before this Court is whether a professional business organization which is a corporation under state law is a corporation for federal tax purposes wthin the meaning of 26 U.S.C. § 7701(a) (3), which provides that: "The term `corporation' includes associations, joint-stock companies, and insurance companies." We hold that it is.

The United States appeals from a judgment in an income tax refund action. District Judge Thomas D. Lambros rendered judgment in favor of the taxpayer, after hearing the case on stipulated facts. The opinion of the District Judge is reported at 281 F.Supp. 359 (N.D. Ohio). For the reasons set forth below we affirm the judgment of the District Court.

The relevant facts are simple. Dr. Hugh A. O'Neill¹ (the taxpayer) is a shareholder, director and employee of Drs. Hill & Thomas Company (the Company). In his return for the fiscal year ending January 31, 1966, the taxpayer reported and paid taxes on the amount of income of the Company which would have been taxable to him had the Company been a partnership.² Having filed a timely claim for refund which was not granted, the taxpayer filed this action for refund of the tax paid on the difference between the amount reported as if partnership income and the salary payments for the taxable year includable in his gross income as an employee of the Company.

After operating for about 55 years as a partnership, Drs. Hill & Thomas was reorganized as Drs. Hill & Thomas Company in 1963 under the Ohio Professional Association law, Ohio Rev.Code §§ 1785.01-1785.08.³ The ten partners became shareholders in the Company. In addition to the shareholders the Company employed other doctors in providing its radiological services through contractual arrangements with five hospitals and through the operation of three offices of its own.

The District Court found as a fact that the Company was changed from a partnership to its present status under Ohio law for "the non-tax `business purpose' of controlling a sizeable and unwieldy organization * * *." 281 F.Supp. at 361. The Government does not challenge this finding. The Court further held that Treasury Regulation § 301.7701-2 (h),⁴ upon which the Government had based its conclusion that the Company was a partnership for tax purposes, was invalid as administrative overreaching without support in the law.⁵ Judgment was entered for the taxpayer on the basis of the Court's conclusion that under Treas.Reg. § 301.7701-2(a-f) the Company was a corporation for federal tax purposes. The District Court also held that the Company should be regarded as a corporation under Ohio law.

The Government urges before this Court that: (1) Treas.Reg. § 301.77012(h) is valid; (2) under Treas.Reg. § 301.7701-2(h) the Company is a partnership for federal tax purposes; and in the alternative (3) the Company is a partnership under Treas.Reg. § 301.7701-2(a-f). The gist of the Government's position is that in order to be a corporation for federal tax purposes a state chartered corporation must be tested against the criteria of Morrissey v. Commissioner of Internal Revenue, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263, as developed in the cases and the Regulations. The statute provides in relevant part:

"§ 7701. Definitions

"(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof —

* * * * * *

"(2) Partnership and partner. — The term `partnership\' includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term `partner\' includes a member in such a syndicate, group, pool, joint venture, or organization.

"(3) Corporation. — The term `corporation\' includes associations, joint-stock companies, and insurance companies.

* * * * * *

"(b) Includes and including. — The terms `includes\' and `including\' when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined."

In our view the question in this case is one of statutory construction. Did Congress in the statutes from 1918 to the present, when it used identical language with respect to the term "corporation," mean that some state chartered corporations should not be treated as corporations for federal tax purposes?⁶

1) The Morrissey Case

The Government urges that the determination of whether a business corporation under state law is a corporation for federal tax purposes must be made under criteria of federal law. It argues for finding that standard in the relevant statutes, the Regulations, and Morrissey v. Commissioner of Internal Revenue, supra, 296 U.S. 344, 56 S.Ct. 289. We hold that Morrissey is not controlling in the present case.

In Morrissey the question was whether a trust created for the development of a tract of land was an "association" under federal tax law and hence taxable as a corporation. The Court was not called on to define a corporation for purposes of federal taxation. Since the Court was not defining the word "corporation" and was dealing with a trust, it did not mention such characteristics of a corporation as existence by virtue of a charter granted by the sovereign, status as a legal entity separate from its owners, and being a person in contemplation of law. The Court asked this question:

"What, then, are the salient features of a trust — when created and maintained as a medium for the carrying on of a business enterprise and sharing its gains — which may be regarded as making it analogous to a corporate organization?" 296 U.S. at 359, 56 S.Ct. at 296.

In answering that question the Court made the following statements about corporate characteristics:

"A corporation, as an entity, holds the title to the property embarked in the corporate undertaking. * * * Corporate organization furnishes the opportunity for a centralized management through representatives of the members of the corporation. * * * An enterprise carried on by means of a trust may be secure from termination or interruption by the death of owners of beneficial interests and in this respect their interests are distinguished from those of partners and are akin to the interests of members of a corporation. And the trust type of organization facilitates, as does corporate organization, the transfer of beneficial interests without affecting the continuity of the enterprise and also the introduction of large numbers of participants. The trust method also permits the limitation of the personal liability of participants to the property embarked in the undertaking." 344 U.S. at 359, 56 S.Ct. at 296. (Emphasis added.)

The Morrissey case did not deal with the definition of "corporation" under the statute, and we hold that it in no way supports the position of the Government that a corporation under state law must meet a test of resemblance to some federal standard of corporateness, before it will be taxed as a corporation under federal law.

2) The Statutory Foundation

We find our starting point, as did the Supreme Court in the Morrissey case, in the Corporation Tax Act of August 5, 1909, c. 6, § 38, 36 Stat. 11, 112-117:

"Sec. 38. That every corporation, joint stock company or association, organized for profit and having a capital stock represented by shares, and every insurance company, now or hereafter organized under the laws of the United States or of any State or Territory of the United States or under the acts of Congress applicable to Alaska or the District of Columbia, or now or hereafter organized under the laws of any foreign country and engaged in business in any State or Territory of the United States or in Alaska or in the District of Columbia, shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by such corporation, joint stock company or association, or insurance company, equivalent to one per centum upon the entire net income over and above five thousand dollars received by it from all sources during such year, exclusive of amounts received by it as dividends upon stock of other corporations, joint stock companies or associations, or insurance companies subject to the tax hereby imposed; or if organized under the laws of any foreign country, upon the amount of net income over and above five thousand dollars received by it from business transacted and capital invested within the United States and its Territories, Alaska, and the District of Columbia during such year, exclusive of amounts so received by it as dividends upon stock of other corporations, joint stock companies or associations, or insurance companies subject to the tax hereby imposed." (Emphasis added.)

Construing this Act in Eliot v. Freeman, 220 U.S. 178, 187, 31 S.Ct. 360, 361, 55 L.Ed. 424, the Supreme Court held that "it was the intention of Congress to embrace within the corporation tax statute only such...