United States v. Donruss Company
| Decision Date | 13 January 1969 |
| Docket Number | No. 17,17 |
| Citation | 393 U.S. 297,89 S.Ct. 501,21 L.Ed.2d 495 |
| Parties | UNITED STATES, Petitioner, v. The DONRUSS COMPANY |
| Court | U.S. Supreme Court |
See 393 U.S. 1112, 89 S.Ct. 848.
Mitchell Rogovin, Washington, D.C., for petitioner.
Richard L. Braunstein, Washington, D.C., for respondent.
This case involves the application of §§ 531—537 of the Internal Revenue Code of 1954, which impose a surtax on corporations 'formed or availed of for the purpose of avoiding the income tax with respect to * * * (their) shareholders * * * by permitting earnings and profits to accumulate instead of being divided or distributed.'
Respondent is a corporation engaged in the manufacture and sale of bubble gum and candy and in the operation of a farm. Since 1954, all of respondent's out- standing stock has been owned by Don B. Wiener. In each of the tax years from 1955 to 1961, respondent operated profitably, increasing its undistributed earnings from $1,021,288.58 to $1,679,315.37. The company did not make loans to Wiener or provide him with benefits other than a salary, nor did it make investments unrelated to its business, but no dividends were declared during the entire period.
Wiener gave several reasons for respondent's accumulation policy; among them were capital and inventory requirements, increasing costs, and the risks inherent in the particular business and in the general economy. Wiener also expressed a general desire to expand and a more specific desire to invest in respondent's major distributor, the Tom Huston Peanut Company. There were no definite plans during the tax years in question, but in 1964 respondent purchased 10,000 shares in Tom Huston at a cost of $380,000.
The Commissioner of Internal Revenue assessed accumulated earnings taxes against respondent for the years 1960 and 1961. Respondent paid the tax and brought this refund suit. At the conclusion of the trial, the Government specifically requested that the jury be instructed that:
'(I)t is not necessary that avoidance of shareholder's tax be the sole purpose for the unreasonable accumulation of earnings; it is sufficient if it is one of the purposes for the company's accumulation policy.'
The instruction was refused and the court instructed the jury in the terms of the statute that tax avoidance had to be 'the purpose' of the accumulations. The jury, in response to interrogatories, found that respondent had accumulated earnings beyond the reasonable needs of its business, but that it had not retained its earnings for the purpose of avoiding income tax on Wiener. Judgment was entered for respondent and the Government appealed.
The Court of Appeals reversed and remanded for a new trial, holding that 'the jury might well have been led to believe that tax avoidance must be the sole purpose behind an accumulation in order to impose the accumulated earnings tax.' Donruss Co. v. United States, 384 F.2d 292, 298 (C.A.6th Cir. 1967). The Court of Appeals rejected the Government's proposed instruction and held that the tax applied only if tax avoidance was the 'dominant, controlling, or impelling motive' for the accumulation. Ibid. We granted the Government's petition for certiorari to resolve a conflict among the circuits1 over the degree of 'purpose' necessary for the application of the accumulated earnings tax, and because of the importance of that question in the administration of the tax. 390 U.S. 1023, 88 S.Ct. 1406, 20 L.Ed.2d 280 (1968).
The accumulated earnings tax is established by §§ 531—537 of the Internal Revenue Code of 1954. Section 531 imposes the tax.2 Section 532 defines the corporations to which the tax shall apply. That section provides:
'The accumulated earnings tax imposed by section 531 shall apply to every corporation * * * formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.'3
Section 533(a) provides that:
'For purposes of section 532, the fact that the earnings and profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the income tax with respect to shareholders, unless the corporation by the preponderance of the evidence shall prove to the contrary.'
In cases before the Tax Court, § 534 allows the taxpayer in certain instances to shift to the Commissioner the burden of proving accumulation beyond the reasonable needs of the business. Section 535 defines 'accu- mulated taxable income.' It also provides for a credit for that portion of the earnings and profits retained for the reasonable needs of the business, with a minimum lifetime credit of $100,000. Finally, § 537 provides that 'reasonable needs of the business' include 'reasonably anticipated' needs.
The dispute before us is a narrow one. The Government contends that in order to rebut the presumption contained in § 533(a), the taxpayer must establish by the preponderance of the evidence that tax avoidance with respect to shareholders was not 'one of the purposes' for the accumulation of earnings beyond the reasonable needs of the business. Respondent argues that it may rebut that presumption by demonstrating that tax avoidance was not the 'dominant, controlling, or impelling' reason for the accumulation. Neither party questions the trial court's instructions on the issue of whether the accumulation was beyond the reasonable needs of the business, and respondent does not challenge the jury's finding that its accumulation was indeed unreasonable. We intimate no opinion about the standards governing reasonableness of corporate accumulations.
We concl de from an examination of the language, the purpose, and the legislative history of the statute that the Government's construction is the correct one. Accordingly, we reverse the judgment of the court below and remand the case for a new trial on the issue of whether avoidance of shareholder tax was one of the purposes of respondent's accumulations.
Both parties argue that the language of the statute supports their conclusion. Respondent argues that Congress could have used the article 'a' in §§ 532 and 533 if it had intended to adopt the Government's test. Instead, argues respondent, Congress used the article 'the' in the operative part of the statute, thus indicating that tax avoidance must at least be the dominant motive for the accumulation.4 The Government argues that respondent's construction gives an unduly narrow effect to the word 'the.' Instead, contends the Government, this Court should focus on the entire phrase 'availed of for the purpose.' Any language of limitation should logically modify 'availed of' rather than 'purpose' and no such language is present. The Government further argues that Congress has dealt with similar problems in other sections of the Code and has used terms such as 'principal purpose,' §§ 269(a), 357(b)(1), and 'used principally,' § 355(a)(1)(B). Similar terms could have been used in §§ 532(a) and 533(a), but were not. Finally, the Government points to the fact that prior to adoption of § 102 of the Revenue Act of 1938, (52 Stat. 483) the forerunner of § 532(a) used the words 'the purpose,' while the evidentiary section used the words 'a purpose,' thus indicating that tax avoidance need only be one purpose. Respondent replies that the change from 'a' to 'the' in the evidentiary section supports its conclusion. Respondent also contends that the statute before the change was consistent with its construction.
We find both parties' arguments inconclusive. The phrase 'availed of for the purpose' is inherently vague, and there is no indication in the legislative history that Congress intended to attach any particular significance to the use of the article 'the.' Nor do we find the change in the evidentiary section from 'a' to 'the' at all helpful. That change came as part of a significant revision in the operation of the section, and there is no indication that it was other than a mere change in phraseology.5 Indeed, the Report of the Senate Finance Committee accompanying the bill that was to become the Revenue Act of 1938, insofar as it sheds any light on the question, supports the view of the Government. 'The proposal is to strengthen (the evidentiary) section by requiring the taxpayer by a clear preponderance of the evidence to prove the absence of any purpose to avoid surtaxes upon shareholders. * * *.' S.Rep.No. 1567, 75th Cong., 3d Sess., 5 (1938) (emphasis added). Since the language of the statute does not provide an answer to the question before us,6 we have examined in detail the relevant legislative history. That history leads us to conclude that the test proposed by the Government is consistent with the intent of Congress and is necessary to effectuate the purpose of the accumulated earnings tax.
The accumulated earnings tax is one congressional attempt to deter use of a corporate entity to avoid personal income taxes. The purpose of the tax 'is to compel the company to distribute any profits not needed for the conduct o its business so that, when so distributed, individual stockholders will become liable' for taxes on the dividends received, Helvering v. Chicago Stock Yards Co., 318 U.S. 693, 699, 63 S.Ct. 843, 846, 87 L.Ed. 1086 (1943). The tax originated in the Tariff Act of 1913, 38 Stat. 114, the first personal income tax statute following ratification of the Sixteenth Amendment. That Act imposed a tax on the shareholders of any corporation 'formed or fraudulently availed of for the purpose of preventing the imposition of such tax through the medium of permitting such gains and profits to accumulate instead of being divided or distributed * * *.' § II(A)(2), 38 Stat. 166. The same section provided that...
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