United States v. Florida

• Decision Date: 10 December 1965
• Docket Number: No. J-1141.,J-1141.
• Citation: 252 F. Supp. 806
• Parties: UNITED STATES of America, Plaintiff, v. Andrew J. FLORIDA et al., Defendants.
• Court: U.S. District Court — Eastern District of Arkansas

252 F. Supp. 806

UNITED STATES of America, Plaintiff, v. Andrew J. FLORIDA et al., Defendants.

No. J-1141.

United States District Court E. D. Arkansas, Jonesboro Division.

December 10, 1965.

Robert L. Handros, John Adler, Norman Bayles, Attys., Dept. of Justice, Washington, D. C., and Robert D. Smith, Jr., U. S. Atty., E. D. of Arkansas, on the brief, for plaintiff.

Leon B. Catlett, Little Rock, Ark., E. J. Ball, Fayetteville, Ark., for defendants.

HENLEY, Chief Judge.

This protracted tax case was commenced by the Government in 1959 pursuant to 26 U.S.C.A. § 7403, for the purpose of establishing federal income tax liabilities, including fraud penalties, and to have federal tax liens declared and foreclosed with respect to certain Arkansas properties, both real and personal. The principal defendants are Andrew J. (A.J.) Florida and his brother, George H. (G.H.) Florida, citizens of Osceola, Mississippi County, Arkansas, and certain Arkansas and Tennessee corporations which during the relevant period of time were owned and controlled by the Florida brothers. The tax years involved are 1951, 1952, 1953, 1954, and 1959. Originally, alleged tax liabilities for 1949 were also involved, but the Government's claims with respect to that year have been abandoned.

Upon the filing of the suit in March 1959 a receiver pendente lite was appointed to take charge of the property and affairs of certain of the defendants. United States v. Florida, E.D.Ark., 178 F.Supp. 627, aff'd 8 Cir., 285 F.2d 596.

The cause has been tried to the Court and has been submitted upon a voluminous record. This memorandum incorporates the Court's findings of fact and conclusions of law. All requests for findings and conclusions submitted by the respective parties are denied, except to the extent that they may be incorporated in this memorandum.

From 1949 through 1954 the Florida brothers engaged in business individually and through their controlled corporations; they also operated as co-partners. The business consisted principally of the construction and sale of residential housing in and around Memphis, Tennessee, but the Florida brothers also had other income producing enterprises, including dealings in real estate, farming, money lending, loan brokerage, and insurance. A. J. Florida and his wife also traded extensively in stock market securities, and both of the Florida brothers traded on the commodities market.

The construction of Tennessee housing with which the Court is concerned was carried out by 12 Tennessee corporations, which may be referred to collectively as the building corporations. Those corporations were: Evans & Evans, Inc., Frayser Co., Inc., Gaylord Co., Inc., Joel Construction Co., Mason Co., Inc., McAdams Co., Inc., Norfolk Co., Inc., R. M. Supply Co., Inc., Southern Housing Co., Speck Co., Inc., Wells Station Co., Inc., and Yow Co., Inc. Those corporations had common offices in Memphis, common office personnel, and common office management. With certain exceptions they were named after corporate officers or employees, and their stock was held nominally by such officers or employees. The Court finds, however, that the nominal stockholders were mere strawmen, and that all of the corporate stock of the building corporations was actually owned by the Florida brothers.

Another Tennessee corporation which is a defendant here is Acme Insurance Co., Inc., which was known for a time as Continental Insurance Co., Inc., and then later by its original name of Acme. That corporation's main source of income was premiums paid by the building corporations. The stock of Acme, like the stock of the building corporations, was actually owned by the Floridas.

The Arkansas corporations named as defendants herein are: Montgomery Investment Co. (formerly Continental Mortgage Co.), Continental Investment Co., Florida Real Estate Loan Co. (FREL), Williams Investment Co., Continental Co., and Laran, Inc., Montgomery Investment Co., hereinafter referred to by its original name, Continental Mortgage Co., Continental Investment Co., Continental Land Co., and FREL did business with the building corporations and also had dealings with businesses outside the Florida network. Williams Investment Co. and Continental Co. seem to have been primarily conduits for funds expended eventually for the benefit of the Florida brothers and Mrs. A. J. Florida.

The Arkansas corporations were centralized at Osceola, and, like the building corporations, had common office management and personnel. Funds from certain of the Arkansas corporations flowed to the building corporations, and the latter corporations, virtually penniless themselves as far as day to day operating capital was concerned, were dependent on the Arkansas corporations for the payment of their expenses.

The Florida operations were extensive and obviously produced tax consequences of great magnitude. During the period in question millions of dollars came into the Florida corporate network from outside sources, moved back and forth within the network, and eventually passed out of that network. Much of the flow of cash to destinations outside the network represented business expenses properly deductible from corporate gross income in determining corporate tax liabilities. The rest of that flow came back to the partnership of A. J. and G. H. Florida or to the brothers individually or was spent for their personal benefit.

A chart of the Florida organization, introduced by the Government in the course of the trial, and which the Court finds to be accurate in general, depicts income entering the Florida network from such sources as sales of housing, loans, sales of mortgages and construction loans, interest, and commissions. The chart also shows the flow of cash within the network and to outside recipients.

In connection with its appointment of a receiver in the case the Court said in United States v. Florida, supra (p. 630 of 178 F.Supp.):

"The record reflects that for a number of years prior to the filing of this suit the Florida brothers had so manipulated the affairs of their corporations as to bring about numerous and perplexing transfers of property and funds among the corporations, and had also diverted large amounts of corporate funds to their own use. Such diversions were frequently effected by means of concealed or disguised payments with personal expenses of the Floridas being paid directly by the corporations and charged up as business expenses of the latter. The net effect of these diversions and transfers has been that the corporations, except Reserve Estate, Laran, Inc., Florida Real Estate Loan Co., and Fidelity Mortgage Co., now appear to be practically if not entirely, devoid of assets."

The theory of the Government is that with respect to 1951, 1952, 1953, and 1954 the Florida brothers and their corporations vastly understated their taxable incomes. Much of the alleged understatement of income is claimed to have been fraudulent; as to the rest of it no fraud is claimed.

With respect to those years the Floridas and some of their corporations reported taxable income totaling $817,465.15. Norfolk Co., Inc. showed an overall loss for the three years in which it did business, and other corporations showed losses in certain years.

The present position of the Government is that the true taxable income of the defendants, both reported and unreported, for the years under consideration was $7,498,125.56, and that the alleged under reporting of $6,680,660.41 was fraudulent to the extent of $3,503,922.27. The Government's present figures result from the elimination of assessments for 1949, from the abandonment of certain specific fraud claims, and from the making of certain concessions and adjustments in the course of and following the trial of the case.

The 1959 assessments were made against the Florida brothers and their wives, Continental Investment Co., and Laran, Inc. The returns were filed by the receiver, and the deficiencies assessed were minor. No fraud is involved, and the Court does not consider that the assessments for that year are seriously involved in the case. Further discussion, therefore, will be limited to tax years 1951-1954.

As to those years the defendants do not now contend seriously that there were no tax deficiencies. Defendants do contend that the tax liabilities asserted by the Government are grossly excessive, and that the defendants were not guilty of any fraud.

In addition, defendants assert that this Court has no jurisdiction with respect to the Tennessee corporations; that the assessments were untimely; that the assessments were made in violation of 26 U.S.C.A., § 7605(b); that two of the defendants are entitled to certain deductions under section 1311 et seq. of the Internal Revenue Code; and that the Commissioner of Internal Revenue erred in his determinations of overall taxable income and tax liabilities of the respective defendants. Defendants contend still further that they are entitled to certain deductions under the so-called Cohan rule enunciated by the Court of Appeals for the Second Circuit in Cohan v. Commissioner of Internal Revenue, 2 Cir., 39 F.2d 540.

There are certain other issues between the parties which the Court has not yet mentioned, and the ultimate conclusion to which the Court has come in the case renders it unnecessary to discuss all of the issues tendered by the pleadings and the briefs. In this connection it is well established that the income tax laws are to be construed and applied in a practical manner; and it is obvious that in a case as complicated as this one, involving as it does numerous taxpayers, four tax years, and transactions running into millions of dollars, it is impossible for this Court or any other court to determine with either legal or mathematical exactness the tax liabilities of the respective defendants. The most that the Court can do is to try to reach a substantially accurate and legitimate...