Sioux City Stock Yards Co. v. Commissioner of Int. Rev.

• Court: U.S. Court of Appeals — Eighth Circuit
• Writing for the Court: Parker, it is, among other things, said
• Citation: Sioux City Stock Yards Co. v. Commissioner of Int. Rev., 59 F.2d 944 (8th Cir. 1932)
• Decision Date: 20 June 1932
• Docket Number: No. 9346.,9346.
• Parties: SIOUX CITY STOCK YARDS CO. v. COMMISSIONER OF INTERNAL REVENUE.

59 F.2d 944 (1932)

SIOUX CITY STOCK YARDS CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 9346.

Circuit Court of Appeals, Eighth Circuit.

June 20, 1932.

Robert A. Littleton, of Washington, D. C. (Mason, Spalding & McAtee, of Washington, D. C., on the brief), for petitioner.

Andrew D. Sharpe, Sp. Asst. to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key, Sp. Asst. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and John D. Foley, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for respondent.

Before STONE, KENYON, and GARDNER, Circuit Judges.

GARDNER, Circuit Judge.

This is a petition to review a decision of the United States Board of Tax Appeals assessing excess profit taxes against petitioner for the years 1918, 1919, and 1920.

Petitioner is a corporation organized under the laws of the state of Iowa, with an authorized capital stock of $3,000,000, divided equally between preferred and common stock. It was organized for the purpose of acquiring, owning, and operating a stockyard at Sioux City, Iowa. Its income has been derived from charges for unloading, yarding, and feeding live stock shipped to its yards, and from rentals of office space and other facilities. It has not engaged in the business of buying or selling live stock, and its business success has depended mainly upon its ability to maintain a competitive market for live stock of such character as would cause stock raisers and shippers to deal at its market. Its predecessor, Union Stock Yards Company, had failed because of its inability to establish such a live stock market.

After acquiring certain stockyard facilities at Sioux City, Iowa, it undertook to establish a market such as would induce live stock raisers and shippers to send their live stock to the Sioux City stock market for sale. With this purpose in view, it obtained contracts with Cudahy Packing Company and Armour & Co. to maintain and operate packing plants at the Sioux City stockyards. It entered into three contracts with the Cudahy Company. By the first, dated April 1, 1895, it conveyed to the Cudahy Company twelve acres of land and packing plant improvements thereon, and issued to it $200,000 par value preferred and common stock, in consideration for which the Cudahy Company agreed to operate said plant for a period of ten years from January 1, 1895, and during said period to purchase at the stockyards of petitioner live stock sufficient to enable it to carry on its business as it might conduct it upon the premises conveyed. By the second contract, dated November 17, 1897, petitioner conveyed to the Cudahy Company 5.13 acres of land with improvements thereon, paid that company $100,000 in cash to be expended for further improvements on such premises, and issued to it an additional $300,000 par value of its preferred and common stock, in consideration for which the Cudahy Company agreed to make such necessary changes, alterations, additions, and improvements to its buildings, appurtenances, and machinery to enable it to handle and kill not less than 500 cattle daily, and not less than from 2,000 to 2,500 hogs daily, all to be purchased at petitioner's stockyards. By the third contract, dated January 1, 1906, the Cudahy Company agreed to expend $300,000 on its packing plants covered by the two previous contracts, so as to increase their capacity to 750 cattle, 3,000 hogs, and 500 sheep per day. The packing company agreed that for a period of thirteen and a half years it would purchase daily at the stockyards of petitioner the requirements of live stock to operate its packing plants at capacity. Under this contract petitioner was obligated to pay $150,000 in cash of the stipulated $300,000 to be expended on the premises by the packing company.

By a contract dated May 14, 1901, petitioner conveyed to Armour & Co. a packing plant which had originally cost petitioner $400,000, and on which it had made subsequent improvements at a cost of $136,000, and in addition it issued to Armour & Co. 2,500 shares of its common stock, and 1,500 shares of its preferred stock, in consideration for which Armour & Co. obligated itself to operate a packing plant at petitioner's stockyards at capacity, and to buy its requirements of live stock at such yards.

By reason of these contracts, which petitioner used as collateral security in refinancing its liabilities, it was able to convey the properties mentioned to the packing companies free of all incumbrances. These contracts have been and are being carried out in all particulars, and pursuant thereto the packing companies have operated packing plants and have bought at petitioner's stockyards their requirements of live stock to operate their plants at capacity.

The decision of the Board of Tax Appeals, which affirmed the determination of the Commissioner, involves the right of petitioner to include as invested capital, as the basis for determining income and excess profit taxes for the years 1918, 1919, and 1920, the value of these contracts, in so far as that value is reflected by the exchange of stock therefor. The result of the contracts upon the fortunes of petitioner are set out in the findings of fact of the Board of Tax Appeals as follows: "By virtue of the foregoing and other contracts with packers which the petitioner was able to secure from time to time, and which were available to petitioner for use as collateral in refinancing its mortgage liabilities, it succeeded in establishing at its yards a large competitive market and the advantages accruing to the petitioner from such contracts are directly reflected in the stimulus given to the Sioux City stock market and to the receipts of livestock by the petitioner and petitioner's consequent increase in earnings. Such condition is the normal and expected outcome from relationships such as those established by the petitioner with the various packers. Such relationships are mutually advantageous and benefit both the packer and the stockyard. In addition to the buyers for the packing houses, there were in daily attendance at the stockyards other buyers whose orders and activities were correspondingly increased."

This finding is based upon convincing evidence. Shippers and live stock dealers will ship their cattle, hogs, and sheep only to such markets as assure them a sale for their live stock within a brief time after their arrival, and such markets can only be assured by the establishment of packing plants nearby, whose daily requirements are secured from favorably located stockyards. Up to the close of the year 1918, petitioner had received from the Cudahy Company and the Armour Company for its services in the care and handling of live stock purchased by these companies the sum of $2,357,912.80. In addition, large sums had been paid to it by purchasers of live stock not connected with the packing companies. Its annual receipts of hogs increased from about 350,000 in 1895 to about 2,150,000 in 1917, while its receipts of cattle during the same period increased from 100,000 annually to 700,000.

Petitioner paid its first dividend on its preferred stock at the rate of 4 per cent. per annum in 1900, and continued to pay dividends at that rate until 1905, when the rate was increased to 6 per cent. per annum. In 1905 it began paying dividends on its common stock, and paid at the rate of 2 per cent. per annum on that stock to and including the year 1920, except that the rate was approximately 3 per cent. for the years 1913 and 1916.

In disposing of petitioner's contention that there should be included as a part of its invested capital $900,000 representing the par value of the capital stock transferred to the packing companies for the contracts in question, the Commissioner held that these contracts had expired before 1918, and hence were without value. The Board of Tax Appeals, however, held that the Commissioner was in error in this conclusion, and in so doing said: "We are satisfied from the evidence that a large part of the value of the contracts made by the Cudahy Packing Company and Armour and Company with the petitioner did not vanish with the expiration of the contracts. * * * The relationship which the petitioner established with the Cudahy Packing Company and Armour and Company was approximately as valuable to the petitioner in 1918 as in the years when the contracts were entered into between the petitioner and the packing companies. The self-interest of the packing companies would prompt them to continue this relationship even though the contracts had expired."

The Board, however, reached the conclusion that it was not able to determine from the evidence "that the contracts had a cash value to the petitioner in excess of the cash investment of the petitioner in the properties conveyed to the Packing Companies to induce them to operate packing plants in Sioux City." The holding of the Board of Tax Appeals, that the contract rights survived and were valuable, is followed by a recital that: "The record is silent as to the value of these contracts to the petitioner, either at the date the contracts were first acquired or during the taxable years involved."

It is to be observed that the Board did not, in terms at least, fix the value of the property rights acquired by these contracts, but held that the proof did not establish a value in excess of the cash investment of the petitioner in the properties actually conveyed to the packing companies. It is quite apparent from the findings, and the evidence which supports them, that the property of the petitioner would be of little, if any, value were it not for the property rights secured by these contracts. Just how the Board arrived at the conclusion that their value was limited to the cash investment in the properties conveyed in exchange for them is by no means clear, because the Board in its opinion has said that: "The record is silent as to the value of these...