Powder Mill Realty Trust v. Commissioner
| Decision Date | 09 July 1973 |
| Docket Number | Docket No. 2955-71. |
| Citation | 1973 TC Memo 149,32 TCM (CCH) 707 |
| Parties | Powder Mill Realty Trust v. Commissioner. |
| Court | U.S. Tax Court |
Herbert S. Urbach, 28 State St., Boston, Mass., and Edward D. Grayson, for the petitioner. Robert B. Dugan, for the respondent.
The Commissioner determined deficiencies in petitioner's tax as follows:
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Taxable year Accumulated earnings
ending March 31 Income tax (sec. 531) tax Total
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1966 ............ $ -0- $10,533.92 $10,533.92
1967 ............ 844.80 12,130.08 12,974.88
1968 ............ (865.79) 12,607.98 11,742.19
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The only issue remaining for decision is whether petitioner was availed of during the foregoing taxable years for the purpose of avoiding the income tax with respect to its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed.
The parties have stipulated to certain facts and exhibits which are incorporated herein by this reference.
Petitioner is a "Massachusetts Realty Trust". As more fully described hereinafter, it was organized in 1957 for the purpose of holding real estate that was to be used for the administrative and operational facilities of H.H. Scott, Inc. ("HHS"), a prominent manufacturer and marketer of high fidelity stereophonic and sound measuring equipment. Petitioner has been treated as a corporation for Federal income tax purposes, and its Federal corporate income tax returns for each of its taxable years ending March 31, 1966, 1967 and 1968, respectively, were filed with the district director of internal revenue at Boston, Massachusetts. At the time its petition herein was filed, petitioner's principal office was in Maynard, Massachusetts.
The principal technical expert of HHS, and its chief executive officer for a number of years as well as one of its principal shareholders, was Hermon Hosmer Scott ("Scott"). Scott received bachelor's and master's degrees in electrical engineering from the Massachusetts Institute of Technology, and his professional career in engineering has been one of unusual accomplishment. HHS was organized in 1947, eventually attaining a position of preeminence in the field of electronics. During the period from April 1, 1965 through March 31, 1968, the outstanding capital stock of HHS was held as follows:
No. of
Stockholder Shares Percentage
H. H. Scott ................ 2,969 29.74
Victor H. Pomper ........... 2,202 22.06
John Gillingham ............ 31 .31
E.G. Dyett, Jr. ............ 293 2.94
James Casey ................ 26 .26
Daniel von Ricklinghausen .. 400 4.01
Priscilla W. Scott ......... 8 .08
Jane A. Scott .............. 8 .08
Robert Rines ............... 44 .44
Myron T. Smith, Trustee .... 4,000 40.08
_____ ______
9,981 100.00
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Priscilla W. Scott and Jane A. Scott were the daughters of H.H. Scott. Myron T. Smith held his 4,000 shares in HHS as the trustee of five trusts of which five members of the Scott family (H.H. Scott, his wife Eleanor, Priscilla, Jane and H.H. Scott's brother, Charles) were beneficiaries.
HHS has never held any real estate in its own name. Prior to 1957, the company's operations were carried on in rented quarters in a building located in Cambridge, Massachusetts. HHS grew rapidly during the 1950's, taking over additional space in the Cambridge building from time to time and eventually expanding beyond the limits that the facility could allow. Scott and Victor H. Pomper, the vice-president and a shareholder of HHS and its president at the time of trial herein, undertook a search of the area surrounding Boston for land suitable for the erection of a new plant for the company. At a meeting held on November 13, 1956, Scott and Pomper reported to the HHS shareholders that the best location they had found was one on Powder Mill Road in Maynard, Massachusetts, but that the corporation's own resources were inadequate to finance the proposed building, that loans would be difficult to obtain, and that some form of additional investment by someone closely associated with HHS was a likely course of action. Scott and Pomper had also been advised by counsel of the availability of tax advantages in Massachusetts if the real estate were isolated from the corporation. The shareholders thus resolved as follows:
Pursuant to the foregoing resolution, petitioner was organized under a declaration of trust executed on January 8, 1957, by Scott, his wife Eleanor, and Pomper, as trustees. At all relevant times, Scott has held 51 of petitioner's 100 outstanding beneficial shares, and Eleanor has owned the remaining 49 shares.
Petitioner acquired the parcel of land in Maynard that had been recommended to HHS by Scott and Pomper (the "Powder Mill property"), and on June 13, 1957, Scott, Eleanor and Pomper, in their respective capacities as trustees of petitioner, and Scott, as president and treasurer of HHS, executed an indenture providing, in relevant part, as follows:
In accordance with the terms of the foregoing agreement, a single-story building of approximately 32,000 square feet was erected upon the Powder Mill property to house the entire manufacturing, engineering, administrative and marketing facilities of HHS, which were transferred to Maynard from Cambridge in 1957. Construction costs amounted to approximately $200,000, of which approximately $150,000 was obtained under a first mortgage from a commercial bank. The remaining funds were secured from the Massachusetts Business Development Corporation, under a second mortgage, and the Scott family. Air conditioning units were installed on the roof of the building during petitioner's fiscal year ending March 31, 1960, at a cost of $7,000-$8,000. Those improvements were financed solely by petitioner's accumulated earnings.
The business of HHS continued to expand rapidly, and a need for additional space became apparent sometime after 1960. A second building, of approximately 74,000 square feet, was then erected upon the Powder Mill property. That facility was completed and occupied by HHS in the fall of 1964; prior thereto the corporation fulfilled its additional needs by leasing space elsewhere in Maynard. On September 3, 1963, an indenture representing a supplementary lease to cover the new premises was entered into between petitioner and HHS. That instrument provided that as of September 1, 1964, the aggregate annual rent payable by HHS would be increased to $132,500.
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