Trico Products Corp. v. Com'r of Internal Revenue, 164.
| Decision Date | 19 July 1943 |
| Docket Number | No. 164.,164. |
| Citation | 137 F.2d 424 |
| Parties | TRICO PRODUCTS CORPORATION v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Second Circuit |
Root, Clark, Buckner & Ballantine, Arthur A. Ballantine, and George E. Cleary, all of New York City, for petitioner.
Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, J. Louis Monarch, and Morton K. Rothschild, Sp. Assts. to the Atty. Gen., for respondent.
Before L. HAND, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
This petition to review a decision of the Tax Court of the United States redetermining the surtaxes of the petitioner under § 102 of the Revenue Act of 1934, 26 U.S.C. A. Int.Rev.Acts, page 690, for the years 1934 and 1935, puts in issue whether or not there was substantial evidence to support the conclusion that the petitioner was "availed of for the purpose of preventing the imposition of the surtax upon its shareholders * * * through the medium of permitting gains and profits to accumulate instead of being divided or distributed. * * *"
The petitioner is a New York corporation which has made large profits in the manufacture and sale of its products among which an automatic windshield wiper for automobiles took first place. That was made and sold under a basic patent which expired in 1942 and under improvement patents whose expiration dates are not shown but were in the more distant future. The petitioner was also in a strong position because of its management, experience, manufacturing facilities, financial resources and business contacts and contracts; and was, during each of the taxable years involved, reasonably expected to continue as a leading manufacturer in its field after its basic windshield wiper patent expired.
It had been incorporated in 1920 under a charter which empowered it not only to manufacture and sell as it did but to acquire, hold and dispose of stock, bonds and other securities. As it prospered, it indulged increasingly in the accumulation of securities by using part of its earnings for that purpose. It had taken over another corporation which the same men who organized it had incorporated in 1917 and by 1927 it was again ready for a change in its capital structure. By this time it had twenty-one stockholders, a majority of whom had been interested in the business from the start and its officers and directors were all from this original group.
In that year, a banking syndicate made a contract with the stockholders of the petitioner and S. H. Evans, petitioner's treasurer, as syndicate manager. Under the terms of this contract a recapitalization of the petitioner took place and resulted in the issuance of 225,000 shares of common stock without par value and entitled to share ratably in all dividends declared and of 450,000 shares of restricted stock without par value and entitled to share ratably in that part only of dividends which should be declared in excess of $2.50 in any one year on each of the free shares. There was no other kind of stock. The bankers agreed to, and did, purchase 175,000 of the unrestricted shares for $4,225,000 in cash; the twenty-one old stockholders took the rest of the unrestricted shares and all of the restricted shares were also taken by them. In accordance with the syndicate agreement all of the latter were put into a voting trust which provided for their release as free shares as follows:
"It is agreed that commencing January 1, 1928, up to 112,500 deferred shares may be exchanged for free shares accordingly as net earnings of the Company for the calendar year 1927 or for any year thereafter shall be equal to $5 per share upon the sum of the free shares then outstanding plus the number of free shares required for such exchange and in like manner commencing January 1, 1929, additional deferred shares up to 112,500 may be exchanged accordingly as the net earnings of the Company for the calendar year 1928 or for any year thereafter are equal to $6 per share on the sum of the free shares plus the free shares required upon such exchange and in like manner the remaining 225,000...
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