United States v. Lynch, 12814.

• Decision Date: 27 December 1951
• Docket Number: No. 12814.,12814.
• Citation: 192 F.2d 718
• Parties: UNITED STATES v. LYNCH. LYNCH v. UNITED STATES.
• Court: U.S. Court of Appeals — Ninth Circuit

192 F.2d 718 (1951)

UNITED STATES v. LYNCH.

LYNCH v. UNITED STATES.

No. 12814.

United States Court of Appeals Ninth Circuit.

November 23, 1951.

Rehearing Denied December 27, 1951.

Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack, Robert N. Anderson, Howard P. Locke and Virginia H. Adams, Sp. Assts. to Atty. Gen., for United States.

Velikanje & Velikanje, E. F. Velikanje, S. P. Velikanje and John S. Moore, Jr., all of Yakima, Wash., for Lynch.

Before MATHEWS, ORR and POPE, Circuit Judges.

ORR, Circuit Judge.

We have for determination two appeals. In the first the United States of America, hereinafter referred to as the Government, is appellant, and P. J. Lynch is appellee. In the second P. J. Lynch is appellant, and the United States of America is appellee.

We first consider the appeal of the Government. It concerns the correctness of a determination made by the Commissioner of Internal Revenue, that the net proceeds of profits from the sale of apples, which the Washington Fruit and Produce Company, a corporation had attempted to distribute to its stockholders as a dividend in kind, was taxable to the corporation.

Lynch is one of several stockholders to whom a dividend in kind was issued by the Washington Fruit and Produce Company, a corporation, to which we hereinafter refer as the corporation. This dividend consisted of 21,977 boxes of apples. The corporation at that time had three stockholders and was engaged in the business of growing, handling, warehousing and marketing of fresh fruits and vegetables. The dividend in kind was declared February 28, 1944. The apples distributed as a dividend were on that date owned and held by the corporation in its warehouse. At the same meeting at which the dividend was declared, the shareholders agreed among themselves to pool the apples and entered into an agreement with the corporation to dispose of the apples and account to the shareholders for the net proceeds after deducting the costs of washing, packing and storing. During April 1944 the apples were sold and the proceeds distributed. Possession of the apples was retained by the corporation and the sale thereof accomplished without difficulty, the state of the market being such that solicitation by the corporation for buyers was unnecessary. On April 29, 1944 the corporation was liquidated. The Commissioner held that the excess of the sale price of the apples above cost to the corporation was corporate income. The trial court found otherwise. We think its finding was clearly erroneous for the following reasons: The dividend was not, nor was it intended to be, a liquidating dividend made in the process of winding up corporate affairs. The trial court found the dividend to be an ordinary one, reported as ordinary income by the recipients. The corporation continued to engage in its normal business for a period of two months after the dividend declaration. We are, therefore, required to regard the dividend under consideration here as one declared by a going concern and, inasmuch as the corporation, among other things, was engaged in the business of selling apples the property distributed represented its inventory or stock in trade.¹

It is clear that the shareholders caused the dividend to be declared with the knowledge and expectation that the property distributed would be sold immediately. Furthermore, the simultaneously executed agreement with the corporation to do the selling manifested a purpose on the part of the shareholders to use the corporate agency as the vehicle to effectuate the sale of apples. The corporation was to sell the apples in the normal course of its business, in essentially the same manner, and it is fair to assume to the same persons to whom it would have sold had there been no dividend declared. Under these circumstances we fail to see a motive for the dividend other than to escape taxation. It is fundamental that, "* * * in construing words of a tax statute which describe commercial or industrial transactions we are to understand them to refer to transactions entered upon for commercial or industrial purposes and not to include transactions entered upon for no other motive but to escape taxation."² The dividend in question was not the kind of a distribution contemplated by the statute, § 115(a) of the Internal Revenue Code, 26 U.S.C.A. § 115(a), and must be ignored for tax purposes.³ Distribution of corporate inventory with the expectation of immediate sale by the shareholders pointedly suggests a transaction outside the range of normal commercially-motivated and justifiable corporate activity, yet we have here a stronger case, because the sale was to be made by utilizing the corporation's facilities in the ordinary course of its business; the shareholders did not engage in a separate and independent business in which the apples were to be used.⁴ The shareholders, under the circumstances of this case, cannot avoid payment of the price Congress has decreed must be paid for use of the corporate entity.

In its opinion the trial court used language indicating its belief that the doctrine announced in Court Holding Co. v. C. I. R. 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 567, required a finding in the instant case that the sale was made by the shareholders. The Court Holding Company case, as well as the case of Cumberland Public Service Co. v. U. S., 338 U.S. 451, 70 S.Ct. 280, 282, 94 L.Ed. 251, dealt with liquidating dividends and not, as here, with a dividend in kind by a going concern. In the Cumberland case the Supreme Court points out that "The corporate tax is thus aimed primarily at the profits of a going concern." Hence, in determining the "factual category" in which the present transaction belongs the factor of the going concern is most important. In the instant case, at...