Semagraph Co. v. COMMISSIONER OF INTERNAL REVENUE, 5396.
| Decision Date | 04 December 1945 |
| Docket Number | No. 5396.,5396. |
| Citation | 152 F.2d 62 |
| Parties | SEMAGRAPH CO. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Frank A. McCleneghan, of Charlotte, N. C., for petitioner.
Meyer Rothwacks, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Helen R. Carloss and Helen Goodner, Sp. Assts. to Atty. Gen., on the brief), for respondent.
Before SOPER and DOBIE, Circuit Judges, and BARKSDALE, District Judge.
The Semagraph Company petitions for a review of a decision of the Tax Court which approved the determination of income tax deficiencies against the corporation for the taxable years ended March 31, 1939 and March 31, 1940 in the respective amounts of $3,683.65 and $8,919.98. The determination was based on the ground that the corporation was availed of during these years, for the purpose of preventing the imposition of the surtax upon the sole shareholder through the medium of permitting earnings or profits to be accumulated instead of being divided or distributed.
The Revenue Act of 1938, Ch. 289, 52 Stat. 447, Internal Revenue Code, § 102, 26 U.S.C.A. Int.Rev.Code, § 102, provided that in such an event there should be levied and paid for each taxable year upon the net income of the corporation a surtax equal to 25 per cent of the undistributed net income not in excess of $100,000; and further provided that the fact that the earnings or profits of the corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid surtax upon shareholders, unless the corporation by the clear preponderance of the evidence shall prove to the contrary.
The Semagraph Company is a Delaware corporation with its principal place of business in Charlotte, North Carolina. It was incorporated in 1933 and from the beginning its entire stock has been wholly owned by Curtis B. Johnson of that city who has been the publisher and principal owner of the Charlotte Observer, a daily newspaper. He has also been the sole stockholder of the Curtis B. Johnson Corporation which was formerly a personal holding company possessed of assets consisting solely of stocks, bonds, notes and real estate.
Prior to the organization of the taxpayer corporation, Johnson became interested in a machine called the Semagraph, which was intended to obviate the manual operation of linotypes. It was designed by B. L. Green, a machinist employed by the Observer, who, at Johnson's suggestion left the Observer and became an employee of the Curtis B. Johnson Corporation. Several models of the machine were made and demonstrated prior to the incorporation of the Semagraph Company in February, 1933. At that time Johnson paid into the corporation $50,000 for all of its stock. The objects and powers stated in the charter were very broad; and it was also specifically set out that it was the purpose of the corporation to develop the Semagraph machine and its patents and the Semagraph typewriter and its patents. The new corporation took over the machines and the patents and the services of Green, the inventor. It borrowed large sums of money from the Curtis B. Johnson Corporation and from Johnson individually. On March 31, 1935 the Curtis B. Johnson Company was merged with the taxpayer corporation under the latter's name and thereupon the latter acquired the assets and assumed the responsibilities formerly belonging to each corporation. Johnson received all the shares of the merged corporation in exchange for his old stock in both companies. Immediately before the merger the taxpayer had an earned surplus of $8,756.42, while the Johnson Corporation had a paid-in surplus of $666,121.16 and an earned surplus of $471,337.78.
Johnson was also the majority stockholder of the Charlotte Engraving Company, a manufacturing concern, and in 1937 purchased the minority interests and caused this corporation also to be merged with the taxpayer. Thereupon the taxpayer caused to be a personal holding company for the purposes of the surtax on such companies.
From its incorporation the taxpayer has been engaged in the promotion of the invention and at the time of the trial had expended about $135,000 for this purpose. From time to time Johnson conferred with financiers, printing machine company executives and newspaper publishers and endeavored to enlist their financial cooperation so that the new machine might be manufactured and distributed. He...
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