Trico Products Corporation v. McGowan
Decision Date | 03 July 1946 |
Docket Number | Civil Action No. 1999. |
Citation | 67 F. Supp. 311 |
Parties | TRICO PRODUCTS CORPORATION v. McGOWAN, Collector of Internal Revenue. |
Court | U.S. District Court — Western District of New York |
Kenefick, Cooke, Mitchell, Bass & Letchworth, of Buffalo, N. Y., and Medina & Sherpick, of New York City , for plaintiff.
George L. Grobe, U. S. Atty., and R. Norman Kirchgraber, Asst. U. S. Atty., both of Buffalo, N. Y., Harold D. Thomas, Sp. Atty. for Bureau of Internal Revenue, of Washington, D. C., Sewall Key, Acting Asst. Atty. Gen., and Andrew D. Sharpe, Homer Miller, and Michael Gould, Sp. Assts. to Atty. Gen., for defendant.
This is an action for the refund of federal taxes paid under Section 102 of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev. Acts, page 851, by the plaintiff, a New York State corporation, to the defendant Collector of Internal Revenue for the 28th District of New York.
Plaintiff alleges three causes of action. In the first it demands judgment for $740,918.28, paid to defendant on October 7, 1943, being the sum of $532,468 additional income tax for the calendar year 1936 and $208,450.28 interest. In the second it demands judgment for $980.46, being the sum of $704.62 excessive payment made to defendant on October 7, 1943, because of failure to allow a deduction of $11,743.65, as alleged in the first cause of action, and $275.84 interest. In the third it demands judgment for $801,710.29, paid to defendant on October 7, 1943, being the sum of $602,119.91 additional income tax for the calendar year 1937 and $199,590.38 interest.
The total amount of refund, exclusive of interest, demanded by plaintiff in its three causes of action is $1,543,609.03.
Since the Attorney General, after service of the answer, directed an administrative refund of $11,341.02, plus interest, involving depreciation in patents, the only question now presented, according to defendant's brief, is: "Whether taxpayer in 1936 and 1937 was availed of for the purpose of preventing the imposition of the surtax upon its shareholders or the shareholders of Trico Securities Corporation through the medium of permitting its earnings or profits to accumulate instead of being divided or distributed, as provided in Section 102, Revenue Act of 1936."
Section 102, Revenue Act of 1936, provided in part as follows:
Defendant's answer admits the allegation that "At no time was the plaintiff a mere holding or investment company."
Two questions must be decided in this case: (1) Did plaintiff during the calendar years 1936 and 1937 permit its earnings or profits to accumulate beyond the reasonable needs of its business? (2) If so, was this done to avoid surtax upon shareholders? If the first question is answered no, judgment must be rendered for the plaintiff.
The history of the plaintiff corporation prior to 1936 is reported in Trico Products Corp. v. Commissioner, 46 B.T.A. 346; Id., 2 Cir., 137 F.2d 424. From the facts there stated and the evidence in the instant case, the following may be deemed established:
Plaintiff's history begins with the organization of Tri-Continental Corporation in 1917. An automobile accident brought forcibly to the attention of John R. Oishei, now Trico's president, the need for some device to keep automobile windshields clear. He discovered that one John W. Jepson of Buffalo, New York, had invented a windshield wiper, which he was delivering in market baskets. Mr. Oishei then organized said corporation to distribute this wiper. He was joined by Dr. Peter C. Cornell and, with $10,000 borrowed capital, they began business. About eight or nine months after incorporation, the Tri-Continental bought Jepson's business and manufactured and distributed his wiper under the name "Rain Rubber." World War I proved disastrous to its business, which it tried to revive after the war ended. Car manufacturers had changed the construction of windshields and this had made the "Rain Rubber" unworkable. Mr. Oishei then invented a new type of wiper called the "Crescent Cleaner," which proved successful. To exploit this new invention, plaintiff was incorporated in New York State on April 26, 1920.
Plaintiff took over all the assets of the Tri-Continental. Its capitalization consisted of 7,500 shares of common and 2,500 shares of preferred stock. The certificate of incorporation provided:
"The Board of Directors shall have absolute discretion to determine, from time to time, what sum shall be retained by the Corporation out of its surplus profits * * * before the declaration of any dividend upon the common stock, as working capital for the Corporation, and the stockholders shall have no right to insist upon the distribution of any profits so reserved by the Board of Directors."
Plaintiff still had insufficient capital and was hard pressed. Mr. Oishei then invented a power-operated wiper, known as the "Trico" and the sales of the hand-operated "Crescent Cleaner" increased. In 1924, plaintiff bought the assets of the defunct Polk-Hueber Company of Seattle to acquire its patent on an automatic windshield wiper known as the "Visionall."
From 1922 through 1925, plaintiff was subject to severe competition, particularly from Folberth Auto Specialty Company of Cleveland, which sued it for alleged patent infringement. It bought out the Folberth Company in 1925 for $1,000,000, and increased the number of its preferred shares to 15,000. In 1926 it secured a reissue of the Hueber patent after it had been determined by the Patent Office as between Folberth and Hueber that Hueber was the first inventor. In 1927 its basic patents on the vacuum-operated windshield wiper were judicially determined to be valid. Trico Products Corp. v. Perfection Products Co., D.C., 19 F.2d 173, affirmed 6 Cir., 31 F.2d 522. These patents expired on January 25, 1942.
By 1927 plaintiff had conquered the windshield wiper field. Pres. Oishei testified that in 1927, about 70% of all cars being produced, except Fords, were equipped with the Trico vacuum-operated wiper and the remaining cars with the Trico hand-operated wiper.
Since the organization of the Trico corporation, John R. Oishei has been its president and acting head. In 1927 plaintiff's outstanding common stock of 7,999.91 shares was held by 21 stockholders. Mr. Oishei and Dr. Cornell held 4,519.955 shares.
In 1927 a banking syndicate made a contract with plaintiff's 21 stockholders, a majority of whom had been interested in the business from the start. The terms of this contract are stated in Trico Products Corp. v. Commissioner, 2 Cir., 137 F.2d 424, 425, where it is said:
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