United Business Corporation v. Commissioner of Int. Rev., 17.
| Decision Date | 16 January 1933 |
| Docket Number | No. 17.,17. |
| Citation | 62 F.2d 754 |
| Parties | UNITED BUSINESS CORPORATION OF AMERICA v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Second Circuit |
H. Duane Bruce and William A. Mackenzie, both of Syracuse, N. Y., for appellant.
G. A. Youngquist, Asst. Atty. Gen., and Sewall Key and Andrew D. Sharpe, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and A. H. Fast, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for appellee.
Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
The petitioner is a corporation organized on April 1, 1920, to take over real property in Seattle, conveyed to it by one Smith, its sole shareholder, except for a few shares to qualify directors. During the year Smith also transferred to it a large number of shares of stock, which he had held for some time before; and still more in 1921. The Board found in view of the business of the company and of the manner of acquisition of the shares, that during the second year the income from them was allowed to accumulate in order to avoid payment by Smith of surtaxes upon the dividends which he would otherwise have received upon them. It was not sure that this had also been his purpose in the first year, and therefore declined to make a like finding for that period. It held that the case fell within section 220 of the Revenue Act of 1921 (42 Stat. 247) and assessed the taxpayer a deficiency of twenty-five per cent. of its income tax as computed for that year. We have not the evidence before us, but the findings disclose a situation which justifies the conclusion, for Smith paid taxes upon a substantial income in 1918 and 1920, and borrowed largely from the petitioner in 1920 and 1921. These loans are incompatible with a purpose to strengthen the financial position of the petitioner, but entirely accord with a desire to get the equivalent of his dividends under another guise. While the Board has not so found, it may be assumed that the company's income, including that derived from the shares, was no more than reasonable for its business needs. The objections to the order in this court are substantially as follows: That section 220 applies only when the accumulation is unreasonable for the corporate purposes; that it was applied retroactively, and, since it imposed a penalty, could not be constitutionally enforced before it was passed; that it is too uncertain in its terms to be valid; that it offends the Tenth Amendment; and that the interpretation adopted by the Board violated settled administrative construction.
The section declares that when a company is formed or used "for the purpose of preventing the imposition of the surtax upon its stockholders" by allowing "its gains and profits to accumulate instead of being divided or distributed," it shall pay twenty-five per cent. more than its proper tax. It is presumptive evidence of such a purpose that it is "a mere holding company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business," provided that the Commissioner shall so certify. Ordinarily it will indeed be difficult to prove the forbidden purpose, unless the accumulations are too large for the fair needs of the business. But it may not be impossible to do so, even though the profits arise out of normal business, as they did not here. The management may for example be shown to have always been sanguine, and to have withheld only small reserves, though prudence justified more. A sudden change of policy, coincident with large increases in the surtax rates, might in that situation betray a purpose to accumulate against a season more propitious for distribution. Or the officers might unguardedly disclose a scheme to avoid surtaxes, though the other evidence was not enough. A statute which stands on the footing of the participants' state of mind may need the support of presumption, indeed be practically unenforceable without it, but the test remains the state of mind itself, and the presumption does no more than make the taxpayer show his hand. Pariso v. Towse, 45 F.(2d) 962 (C. C. A. 2); Alpine Forwarding Co. v. Pennsylvania R. R. Co., 60 F.(2d) 734 (C. C. A. 2).
Here the purpose appears to us, if not transparent, at least plain enough to leave no doubt. The company was in its origin no more than a convenience for Smith's real property holdings. While its charter allowed other activity, unless it were to buttress its financial position, it was discordant with the main design to fill it with nearly...
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...304 U.S. at page 288, 58 S.Ct. 932, 82 L.Ed. 1346. In United Business Corp. of America v. Commissioner, 19 B.T.A. 809, 826, affirmed 2 Cir., 62 F.2d 754, certiorari denied 290 U.S. 635, 54 S.Ct. 53, 78 L.Ed. 552, the Board of Tax Appeals said with respect to a similar provision in the Reven......
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...been said that the statute, without the support of the presumption, would 'be practically unenforceable . . ..' United Business Corp. v. Commissioner, 62 F.2d 754, 755 (CA2), cert. denied, 290 U.S. 635, 54 S.Ct. 53, 78 L.Ed. 552 (1933). What is required, then, is a comparison of accumulated......