Shaw-Walker Company v. CIR
| Decision Date | 13 February 1968 |
| Docket Number | No. 17268.,17268. |
| Parties | The SHAW-WALKER COMPANY, a corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Sixth Circuit |
COPYRIGHT MATERIAL OMITTED
John P. Carroll, Jr., New York City, for petitioner, Davis, Polk & Wardwell, New York City, on the brief, Cyrus J. Halpern, J. Anthony Kline, New York City, Edward C. McCobb, Grand Rapids, Mich., of counsel.
Albert J. Beveridge, III, Atty., Tax Division, Dept. of Justice, Washington, D. C., for respondent, Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, David O. Walter, Attys., Dept. of Justice, Washington, D. C., on the brief.
Before O'SULLIVAN, PHILLIPS and EDWARDS, Circuit Judges.
The taxpayer, the Shaw-Walker Company, seeks review of a decision of the Tax Court finding a deficiency of $1,580,366.50 for the taxable years 1955, 1956 and 1957 in accumulated earnings tax under Section 531, Internal Revenue Code of 1954, 26 U.S.C. § 531.1
The Tax Court agreed with the Commissioner in holding that Shaw-Walker had accumulated earnings to such an extent in prior years that failure of the corporation to distribute all of its current earnings as dividends during the three taxable years in question subjected it to liability for accumulated earnings tax on all its earnings in each of those three years. The Tax Court allowed certain accumulated earnings credits under 26 U.S.C. § 535(c), as hereinafter detailed, but failed to credit them against the tax assessed for any of the taxable years in question because of excessive accumulations during prior years. The result was to tax all the net earnings of the taxpayer for each of the taxable years.
The ultimate findings of fact made by the Tax Court were that during each of the taxable years the taxpayer permitted its earnings and profits to accumulate beyond the reasonable needs, including the anticipated needs, of the business and that during each of these years the corporation was availed of for the purpose of avoiding the income tax with respect to its shareholders by permitting earnings and profits to accumulate instead of dividing or distributing them.
The statement of the taxpayer submitted pursuant to § 534(c) of the Internal Revenue Code, 26 U.S.C. § 534(c),2 which is discussed hereinafter, is filed as an appendix to this opinion. For a more complete statement of facts, reference is made to this appendix and to the Memorandum Findings of Fact and Opinion of the Tax Court, T.C. Memo, 1965-309. The facts will be stated here only to the extent necessary to dispose of the issues discussed in this opinion.
Shaw-Walker was founded by two partners in 1899 with an initial capital of $3,500. At its inception the corporation sold card indexes. During the taxable years the corporation manufactured and sold more than 5,000 different products and advertised that it supplied "everything for the office except machines," principally office furniture, filing supplies and filing equipment.
Management and manufacturing headquarters of the corporation are in Muskegon, Michigan. It sells its products through eighteen branch offices and through numerous local office equipment dealers. For the taxable years annual sales ranged from $22 million to $24 million.
The Walker family has managed the corporation's affairs since 1903 and during the taxable years owned approximately 65 to 70 per cent of its common stock. No stock was held by or available to the public. The Tax Court found that Shaw-Walker was managed informally:
The corporation paid the following salaries and dividends to members of the Walker family during the years 1954-1957:
L. C. Walker Shaw Walker
Calendar
Year Dividends Compensation Dividends Compensation
1954 $179,171 $25,000 $145,100 $15,000
1955 179,721 35,417 145,070 17,083
1956 213,195 50,000 174,048 20,000
1957 213,845 50,000 174,048 21,667
Dividends also were paid to other members of the Walker family who held stock but were not employed by the corporation.
Substantial dividends were paid to stockholders for the years immediately prior to 1954:
Earnings of the
Company After
Year Ended Federal Income Dividends
June 30 Taxes Distributed
1946 $ 195,030 $163,523
1947 1,406,620 402,657
1948 1,514,757 397,670
1949 1,463,724 590,529
1950 1,448,207 638,534
1951 1,580,796 635,884
1952 1,604,558 576,857
1953 1,377,589 638,901
Between the taxable years ended June 30, 1946, and June 30, 1957, the company's earnings after taxes were $18,385,892 and during those years it distributed $6,833,631 in dividends.
The following data is also relevant:
Percentage
of Net Income
Net Taxable (after
Year Income Less Earnings taxes) Distributed
Ended Provision Dividends Retained in as
June 30 for Taxes Distributed the Business Dividends
(%)
1955 $1,460,655.77 $629,646.70 $ 831,009.07 43.1
1956 2,490,240.09 792,604.57 1,697,635.52 31.8
1957 2,519,342.72 856,071.51 1,663,271.21 33.9
The Tax Court found that it was the taxpayer's policy to finance its growth out of its retained earnings and that the last time Shaw-Walker owed money to a bank was in 1938.
Unless a corporation can prove to the contrary by a preponderance of the evidence, the fact that its earnings and profits are permitted to accumulate beyond the reasonably anticipated needs of the business is determinative of the purpose to avoid the income tax in applying the accumulated earnings tax. 26 U.S.C. § 533(a).3 If the taxpayer is able to prove that it accumulated all or any part of its earnings to meet its reasonable business needs, this amount is allowable as a credit against its accumulated earnings tax. 26 U.S.C. § 535(c). Upon receipt of the Commissioner's proposed notice of deficiency, the taxpayer may submit a statement of the grounds (together with facts sufficient to show the basis thereof) upon which it relies to show that the accumulations were for its reasonable business needs. When a § 534(c) statement is filed by the taxpayer in proper form to meet the requirements of the statute, the burden of proving that earnings and profits were accumulated beyond the reasonable needs of the business shifts to the Commissioner. 26 U.S.C. § 534(a).4
Although the fact that the corporation was availed of for the proscribed purpose may be proved by the accumulation of earnings and profits beyond its reasonably anticipated business needs, the purpose to avoid shareholder income tax may also be proved by other circumstances:
Treas.Reg. § 1-533-1.
The issues of whether accumulations are beyond the reasonable needs of the business and whether a corporation has been availed of for the proscribed purpose present questions of fact. The Tax Court's findings of fact may be set aside on review only if they are clearly erroneous. Helvering v. National Grocery Co., 304 U.S. 282, 58 S.Ct. 932, 82 L.Ed. 1346; Kirlin Corp. v. C. I. R., 361 F.2d 818 (6th Cir.).
One of the issues to be determined is whether the § 534(c) statement filed by the taxpayer (appendix hereto) was sufficient to shift to the Commissioner the burden of proving that all or any part of the net earnings and profits were permitted to accumulate beyond the reasonably anticipated needs of the business.
Prior to the trial the taxpayer filed a motion asking the Tax Court to determine that its statement satisfied the requirements of § 534(c) and that the Court determine that the burden of proof had shifted to the Commissioner. The Tax Court denied this motion and ruled that "the interests of both parties as well as that of the Court will best be served by allowing this question to be disposed of at or after trial." 39 T.C. 293.
In the hearing before the Tax Court the Commissioner contended that Shaw-Walker's § 534(c) statement was...
To continue reading
Request your trial
-
J.H. Rutter Rex Mfg. Co., Inc. v. C.I.R.
...to substitute their judgment for the valid business judgment of corporate management to operate without extensive borrowing. See Shaw-Walker Co., 390 F.2d at 213 ("The fact that a taxpayer has financed its growth from retained earnings rather than from the sale of additional stock or commer......
-
United States v. Donruss Company
...cert. denied, 335 U.S. 911, 69 S.Ct. 480, 93 L.Ed. 443 (1949). The Sixth Circuit has adhered to its view in Shaw-Walker Co. v. Commissioner of Internal Revenue, 390 F.2d 205 (1968). A petition for certiorari in that case is now pending in this 2. The rates are 27 1/2% of the accumulated tax......
-
Simons-Eastern Company v. United States
...Investment Company v. United States, 302 F.Supp. 320 (S.D.Tex.1969), aff'd 442 F.2d 87 (5th Cir. 1971). See also Shaw-Walker Company v. C. I. R., 390 F.2d 205 (8th Cir. 1968), vacated and remanded 393 U.S. 478, 89 S.Ct. 707, 21 L.Ed.2d 687 (1968). Conversely, a low personal tax-bracket beli......
-
Nolen v. Shaw-Walker Company
...decision and remanded that case to the Tax Court in an opinion, Shaw-Walker Co. v. Commissioner of Internal Revenue, reported at 390 F.2d 205 (6 Cir. 1968). Thereafter, the Supreme Court vacated our judgment and remanded the case to this court for reconsideration in light of its decision in......
-
Defending the accumulated earnings tax case.
...for the accumulation of earnings and profits. [28] Shaw-Walker Co., v. Commission, T.C. Memo 1965-309 (1965), rev'd on other grounds, 390 F.2d 205 (6th Cir. 1968) (redemption needs allowed). In Wilcox, on the other hand, the court found the redemption plans too speculative in nature to just......