SANDERSVILLE RAILROAD COMPANY v. United States, Civ. A. No. 2653.

CourtUnited States District Courts. 11th Circuit. Middle District of Georgia
Citation385 F. Supp. 59
Docket NumberCiv. A. No. 2653.
PartiesSANDERSVILLE RAILROAD COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.
Decision Date03 July 1974

385 F. Supp. 59

UNITED STATES of America, Defendant.

Civ. A. No. 2653.

United States District Court, M. D. Georgia, Macon Division.

July 3, 1974.

Randolph W. Thrower, Larry J. White, James K. Hasson, Jr., Sutherland, Asbill & Brennan, Atlanta, Ga., for plaintiff.

Jack D. Warren, Fred W. Schwendimann, Tax Div., Dep. of Justice, Washington, D. C., William J. Schloth, U. S. Atty., Macon, Ga., for defendant.

BOOTLE, Senior District Judge:

This cause came on for trial before the Court without a jury. At the conclusion of the trial, the Court invited counsel to prepare proposed Findings of Fact and Conclusions of Law. Counsel have complied and the Court has carefully considered the proposals made. Having those proposals in mind and based upon all the evidence of record, both testimonial and documentary, including stipulations of counsel, the Court now makes its Findings of Fact and Conclusions of Law as follows:


I. Background


This is a civil action instituted by Sandersville Railroad Company ("Plaintiff") against the United States of America ("Defendant") for the refund of $445,468.22 of tax, plus interest, assessed and collected from Plaintiff under sections 531-537 of the Internal Revenue Code of 1954, as amended, as tax upon the assertedly unreasonable accumulation of earnings for the calendar years 1965, 1966, 1967, 1968, and 1969, plus costs and interest as provided by law. (P. Ex. 1, Stip. Par. (1)). After suit was filed, the interest paid by Plaintiff, together with interest thereon, was refunded to Plaintiff pursuant to Stipulation and Order filed November 8, 1972. Therefore, there is involved in this case only the amount of accumulated earnings taxes paid by Plaintiff as follows:

 1965 $ 63,189.26
                 1966 $ 79,488.48
                 1967 $ 79,829.49
                 1968 $106,503.75
                 1969 $116,457.24
                 Total $445,468.22

plus costs and interest to which Plaintiff is entitled on any sums unlawfully assessed and collected as accumulated earnings taxes. The jurisdiction of this Court is not disputed. (P. Ex. 1, Stip.

385 F. Supp. 60
Par. (3) and (4); Pretrial Order Par. 1)


Plaintiff is a Georgia corporation which was incorporated in 1893, and it has been continuously engaged thereafter in the business of operating a shortline railroad in Washington County, Georgia. Plaintiff is, and was at all times, a public utility subject to regulations of the Interstate Commerce Commission and the Georgia Public Service Commission. (P. Ex. 1; Stip. Par. (2); Tr. 63).


Plaintiff was organized by a small group of interested citizens in the Sandersville, Georgia area for the purpose of providing competitive freight service in that area. At that time, the City of Sandersville was served by the Augusta Southern Railroad (later known as the Georgia & Florida Railroad) which ran from Augusta to Tennille through Sandersville, and the Sandersville residents determined that more competitive rates could be secured if a second railroad were built. Plaintiff originally built and operated a four-mile long railroad from Sandersville to Tennille which carried both freight and passengers. The primary freight items carried at that time were cotton and timber. (Tr. 63-64, 66).


Plaintiff had only one rail connection at the time it was formed, with the Central of Georgia Railway, at Tennille, Georgia, and that same situation exists today, except that the Central of Georgia Railway has been acquired by the Southern Railway Company. (Tr. 63, 106-107).


Mr. Ben Tarbutton, Sr. was prevailed upon by the stockholders of Plaintiff to assume control of the Plaintiff in the late 1910's. (Tr. 64). Plaintiff was in poor financial condition at the time but was needed by the community. The portion of the line of the Georgia & Florida Railroad running from Tennille to Augusta through Sandersville was abandoned in the mid-1930's. (Tr. 64-65).


At the time Mr. Tarbutton, Sr. assumed operational control of Plaintiff, the area it served was an economically depressed agricultural community, and it remains so today. (Tr. 65-66). Under the guidance of Mr. Tarbutton, Sr., Plaintiff became a major factor in the industrial development of the Washington County area. During the 1920's, Mr. Tarbutton, Sr. first sought to interest kaolin companies in locating in Plaintiff's area of operation, and he made contact with Edward J. Grassman, president and chief executive officer of Georgia Kaolin Company, in an effort to attract the Georgia Kaolin Company to the Sandersville area. (Tr. 65-66, 67-68). Kaolin clay deposits were and are to be found in great quantities in the Washington County area. The kaolin clay is processed into the form of a fine, white powder. The primary industrial use of kaolin is in the filling and coating of high quality paper. Its other uses are many, including serving as a filler in paint and rubber. (Tr. 88-89, 407). Kaolin processing plants are major industrial installations, requiring large capital expenditures and large quantities of land for the plant itself, for railroad sidings and for effluent settlement ponds. (Tr. 68-77, 411-412; P. Ex. 2(a), 2(b), 2(c) and 2(d)).


The first kaolin plant to locate in Sandersville began production in 1938. (Tr. 66). During the 1940's, three additional kaolin plants were constructed on Plaintiff's line. (Tr. 66-67). At this time, the kaolin clay was mined, processed and shipped by rail in box cars. The cars were loaded with processed kaolin by means of wheelbarrows and shovels from the platform on the back of the Plaintiff's offices. (Tr. 66).

385 F. Supp. 61


After schooling and military service, Ben J. Tarbutton, Jr. and his brother, Hugh M. Harbutton, the two sons of Ben Tarbutton, Sr., returned to Sandersville and were employed full-time by Plaintiff in 1955. (Tr. 62, 537, 1290). Ben Tarbutton, Jr. was designated a vice-president of Plaintiff at that time. (Tr. 62, 316-317, 537).


Around 1955, Mr. Tarbutton, Sr.'s contacts with Mr. Grassman of Georgia Kaolin Company came to fruition, and Mr. Grassman committed a new corporation which was controlled by him, American Industrial Clays, to the construction of a new kaolin plant at a location approximately six miles from Sandersville. The plant was to be built at the site now known as Kaolin, Georgia, after the Plaintiff had acquired the necessary right-of-way and approval of the appropriate regulatory agencies. (Tr. 68, 79, 407-412; P. Ex. 3).


After Plaintiff acquired approval of the Georgia Public Service Commission for construction of the track to Kaolin, Georgia, suit was brought against it to compel it to secure approval of the Interstate Commerce Commission on the grounds that this constituted a major extension of its road and not, as contended by Plaintiff, a mere spur track. (Tr. 170, 283). In Gilmore v. Sandersville Railroad Company, 149 F.Supp. 725 (M. D.Ga.1955), it was determined that this was an extension and that I.C.C. approval was required. Plaintiff then sought approval of the Interstate Commerce Commission, but encountered opposition from individual residents of the Sandersville area. (Tr. 182-185, 284; P. Ex. 10(a)). Among the grounds for objection was the Plaintiff's alleged lack of financial capability to construct the desired track extension and the consequent jeopardy to Plaintiff from the venture. (Tr. 184-185, 284, 287; P. Ex. 10(b)). To counter this objection, Mr. Tarbutton, Sr., assured the Interstate Commerce Commission that the track extension would be constructed without resort to borrowing from financial institutions or liquidation of other assets. (Tr. 184). Mr. Tarbutton, Sr. and his sons advanced funds to Plaintiff to enable construction of the track extension to Kaolin, Georgia. (Tr. 184).


The track extension to Kaolin, Georgia, was completed in 1957. (Tr. 68, 79, 536; P. Ex. 3). After the construction at Kaolin of the American Industrial Clay plant and a second kaolin plant by an existing customer, Plaintiff served seven kaolin plants, and kaolin was the primary commodity carried by Plaintiff and generated the greatest part of its freight revenues. (Tr. 68, 87, 95, 214).


Mr. Tarbutton, Sr. died in September, 1962. (Tr. 61, 82-83, 1129). Ben Tarbutton, Jr. then succeeded to the presidency of the Plaintiff and Hugh Tarbutton became the vice-president. (Tr. 61, 83-85, 1258). At this time, Ben Tarbutton, Jr. was 31 years old and Hugh Tarbutton was 29 years of age. (Tr. 1285-1286).


Following Mr. Tarbutton, Sr.'s death, and through 1969, the stock of the Plaintiff was owned as follows (P. Ex. 1, Stip. Par. 7):

 Shares Percentage
                 Estate of Ben J. Tarbutton, Sr. 1,250 25
                 Ben J. Tarbutton, Jr. 1,525 30.5
                 Hugh M. Tarbutton 1,525 30.5
                 Rosa M. Tarbutton 500 10
                 C. Findley Irwin 200 4
385 F. Supp. 62

Rosa M. Tarbutton is the widow of Mr. Tarbutton, Sr. (Tr. 1121). C. Findley Irwin, now deceased, was unrelated to the Tarbutton family. (Tr. 1128-1129).


The general manager of Plaintiff, Herbert Blackman, who had been in charge of the day-to-day operations of the Plaintiff, died in March 1963. (Tr. 82-84).

II. Operating and Financial Policies 1963 to Date


Following the death of their father, Ben and Hugh Tarbutton realized that their most important task was the convincing of their customers, banking connections, mainline connection and suppliers of their ability to continue to operate Plaintiff efficiently and prudently. They decided that this result could best be accomplished by providing the very highest quality of service and equipment to their customers and by increasing the financial strength of Plaintiff. (Tr. 251-252).


Ben and Hugh Tarbutton also determined that Plaintiff would adopt a policy of growth and would seek aggressively to exploit all opportunities for growth. They believed that Plaintiff would benefit directly from growth by increased freight revenues and...

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