Portage Plastics Company v. United States
| Decision Date | 23 June 1969 |
| Docket Number | No. 66-C-61.,66-C-61. |
| Citation | 301 F. Supp. 684 |
| Parties | PORTAGE PLASTICS COMPANY, Inc., Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Western District of Wisconsin |
James Urdan, Milwaukee, Wis., for plaintiff.
Mitchell Rogovin, Asst. Atty. Gen., Harold J. Heltzer, Atty., Dept. of Justice, Washington, D. C., Edmund A. Nix, U. S. Atty., Madison, Wis., for defendant.
This is an action brought under 28 U.S.C. § 1346(a) (1) to recover United States corporation income taxes and statutory interest assessed and paid thereon for fiscal years ended May 31, 1960, through May 31, 1963, in the amount of $164,733.13 plus interest accumulated from the date of said payment. The action arises under the Internal Revenue Code of 1954.
Several issues are raised by the pleadings, but by stipulation and order the following issue was severed for separate trial: whether plaintiff qualified as a small business corporation within the meaning of Section 1371(a) of the Internal Revenue Code so as to be eligible to elect under Section 1372(a) of the Internal Revenue Code not to be subject to corporate income taxes for its fiscal years ended May 31, 1961, through May 31, 1963. Trial of this issue was had to the court. At the close of plaintiff's case defendant moved to dismiss pursuant to Rule 41(b), Federal Rules of Civil Procedure. The court reserved a ruling.
My findings of fact and conclusions of law appear in this opinion. Rule 52(a).
Most of the facts were stipulated by the parties. The stipulated facts are so found and are incorporated herein by this reference. Those stipulated facts which are necessary for an understanding of the question before the court are set forth herein together with facts found but not stipulated.
Plaintiff is a Wisconsin corporation with its principal place of business in Portage, Wisconsin. At all times here material plaintiff kept its books of account and filed its federal income tax returns on an accrual method of accounting and by fiscal years ending May 31.
Plaintiff was organized on June 1, 1957. On that date plaintiff purchased certain assets in the amount of $100,461.13, and assumed certain liabilities in the amount of $60,927.23, of the Standard Container Corporation (hereinafter Standard), an Illinois corporation engaged in both basketweaving and plastics. The assets purchased by plaintiff were connected with Standard's plastics business.
Prior to and at the time of the transaction the plastics business of Standard was a marginal operation. As of May 31, 1957, Carl Berst was the president and sole stockholder of Standard. William G. Hamilton was plant manager of Standard's plastics division, Eugene Palmbach was Standard's secretary-treasurer, and Armand Cimaroli was Standard's manufacturer's representative.
Plaintiff's articles of incorporation authorized one class of stock denominated as common stock, $10 per share par value. Originally the articles authorized 1000 shares of said stock. Effective January 23, 1962, the articles were amended to increase the authorized shares to 20,000 shares common stock, $10 par value. At all times relevant hereto there was no other class or series of stock authorized by the articles.
The shareholders of the plaintiff and the number of shares held by each shareholder during the years 1957 through 1964 were as follows:
May 31, May 31, May 31, May 31, May 31, May 31, May 31
Shareholder 1958 1959 1960 1961 1962 1963 1964
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William G. Hamilton 800 800 700 700 2800 2800 2800
Ann Hamilton Kirk 100 100 100 100 400 400 400
Eugene Palmbach 100 100 100 100 400 400 400
William Hamilton, Jr. 0 0 100 100 400 400 400
Armand Cimaroli 0 0 0 0 400 400 400
Elizabeth G. Berst 0 0 0 0 0 0 245
Sara Garnett 0 0 0 0 0 0 245
The directors of plaintiff from June 1, 1957, through June 4, 1961, were William G. Hamilton, Ann Hamilton Kirk, and Eugene Palmbach. As of June 4, 1961, Armand Cimaroli succeeded Ann Hamilton Kirk.
William G. Hamilton is the son of Elizabeth G. Berst, the stepson of Carl Berst, the brother of Ann Hamilton Kirk, and the father of William Hamilton, Jr. Sara Garnett is the sister of Elizabeth G. Berst.
On or about June 1, 1957, certain instruments were issued to Elizabeth G. Berst and Sara Garnett in consideration for advances to plaintiff in the amount of $12,500 each. Elizabeth G. Berst advanced $8,500 on June 1, 1957; $2,000 on August 27, 1957; and $2,000 on December 16, 1957. Sara Garnett advanced $5,000 on June 1, 1957, and $7,500 on December 4, 1957. An additional $187.50 was included by Sara Garnett with the December 4, 1957 advance as interest. This amount was returned to her.
In each of the instruments issued to Elizabeth G. Berst and Sara Garnett it was provided that plaintiff promised to pay $12,500; that the amount was payable at Portage, Wisconsin, on June 1, 1962; and that plaintiff would pay interest in the amount of 5 percent of its net profits before taxes. These provisions were set forth on standard note forms.
At the time of the issuance of the instruments a verbal agreement was entered into by the parties to the effect that at the end of the five years either Elizabeth G. Berst or Sara Garnett, or both, could renew the June 1, 1957 instrument at her own request for an additional five years. On June 1, 1962, the two instruments were renewed pursuant to said agreement for an additional five years by the issuance of similar instruments. The plaintiff had no right unilaterally to renew the instruments.
There was no provision in the instruments, nor was there any collateral written or verbal understanding between the parties, for the repayment of the amounts advanced in the event of default on payment of interest. The plaintiff established no sinking fund or other similar provision to retire the obligations within the time periods provided.
In June, 1959, Elizabeth G. Berst and Sara Garnett executed separate written agreements subordinating all their rights under the June 1, 1957 instruments in favor of the City Bank of Portage, Wisconsin, for one year in exchange for the bank's granting plaintiff an open line of credit in the amount of $25,000. On February 8, 1962, Elizabeth G. Berst executed a written agreement subordinating all of her rights under the June 1, 1957 instrument in favor of loans from the First National Bank of Chicago to plaintiff. On March 26, 1962, Sara Garnett executed a written agreement subordinating all of her rights under the June 1, 1957 instrument in favor of loans from the First National Bank of Chicago to plaintiff.
The instruments were recorded as notes payable on the books and records of the corporation and were shown as long term debt and as notes payable on the annual audit reports prepared by certified public accountants and on financial statements furnished to banks and other creditors. The accrual and payment of the amounts characterized as "interest" in the instruments were recorded on the books and records of the corporation in the accrued interest payable account.
Elizabeth G. Berst and Sara Garnett each received the following sums in the following years, and these payments were characterized as "interest": 1959, $957.87; 1960, $4,916.05; 1961, $4,737.31; 1962, $3,323.79; and 1963, $2,245.03.
In June, 1963, Elizabeth G. Berst and Sara Garnett exchanged the June 1, 1962 renewal instruments for 245 shares each of the common stock of plaintiff.
Plaintiff obtained and maintained a life insurance policy on the life of William G. Hamilton in the face amount of $50,000. The original beneficiaries were Elizabeth G. Berst (¼ interest), Sara Garnett (¼ interest), and the Appleton Corporation (½ interest). The Appleton Corporation was owned by Elizabeth G. Berst (10%) and the Appleton Trust (90%). The beneficiaries of the Appleton Trust were Elizabeth G. Berst, William G. Hamilton, Ann Hamilton Kirk, and Elizabeth Siegel, Mr. Berst's sister. The application of insurance which originally gave plaintiff no right to change the beneficiary was amended to reserve the right to plaintiff. Effective December 1, 1960, the Appleton Corporation was removed as a beneficiary of said policy and the interest of Elizabeth G. Berst and Sara Garnett was limited to $12,500 each. Effective December 5, 1963, plaintiff was made the sole beneficiary of said policy.
The balance sheets with respect to plaintiff's operations from its inception through its fiscal year ended May 31, 1964, reflect the following pertinent information:
Total Current Long-Term Capital Undistributed Net
Assets Liabilities Liabilities Stock Earnings Profits
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May 31, 1958 120,948.83 124,433.91 10,000 (13,485.08) (13,485.08)
May 31, 1959 159,848.61 147,549.28 10,000 2,299.33 15,888.55
May 31, 1960 321,707.07 178,423.42 80,195.10 10,000 53,088.55 44,692.15
May 31, 1961 398,633.56 182,297.78 76,934.17 10,000 129,401.61 76,313.06
May 31, 1962 572,515.77 268,493.02 137,203.47 44,000 122,819.28 64,389.99
May 31, 1963 694,745.73 361,178.77 162,898.02 44,000 126,668.94 46,555.71
May 31, 1964 713,973.00 364,394.56 87,037.95 69,000 193,540.49 67,496.88
During the period August 31, 1957, to October 20, 1959, plaintiff borrowed a total of $42,000 from the Appleton Corporation. The...
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Portage Plastics Company v. United States
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