WETTER MANUFACTURING COMPANY v. United States, Civ. No. 69-383.
| Decision Date | 13 May 1971 |
| Docket Number | Civ. No. 69-383. |
| Citation | 330 F. Supp. 444 |
| Parties | The H. WETTER MANUFACTURING COMPANY, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Western District of Tennessee |
Hubert McBride, Armstrong, Allen, Braden, Goodman, McBride & Prewitt, Memphis, Tenn., for plaintiff.
Lynn Ross, U. S. Dept. of Justice, Tax Div., Washington, D. C., for defendant.
MEMORANDUM ORDER AND DECISION
Plaintiff, H. Wetter Manufacturing Company, has sued the defendant, the United States of America, for a refund of Federal personal holding company tax and interest in the amount of $21,839.42, plus interest thereon, for the taxable year ended December 31, 1965. This personal holding company tax was assessed as a result of the Internal Revenue Service's application of Treasury Regulations Section 1.562-1(a) to a dividends paid deduction claimed by the plaintiff.
Both plaintiff and defendant have filed motions for summary judgment in this cause, and the Court has heretofore heard all argument on these motions on October 16, 1970. In addition, the Court has studied the Complaint, the plaintiff's claim for refund, and the plaintiff's answer to the defendant's request for admission, all of which are in the record, and the Court has had the benefit of supporting briefs supplied by both sides of this controversy.
During 1965, the plaintiff, H. Wetter Manufacturing Company, was a personal holding company, and until that year, the company declared and paid dividends each year in sufficient amounts to avoid incurring a personal holding company tax.
In December, 1965, the plaintiff corporation declared a dividend which it paid by distributing cash of $96.00 and stock of Texaco, Inc., with the basis to the company of $2,089.57, but a fair market value of $38,819.00. The company, in its return for that year, claimed a dividends paid deduction for purposes of personal holding company tax in the amount of $38,915.00 (cash dividend of $96.00 plus the fair market value of Texaco, Inc. stock, $38,819.00).
The Internal Revenue Service examined the 1965 calendar year return of the plaintiff and reduced the claimed deduction for dividends paid. Based upon this examination, the Internal Revenue Service assessed $19,373.19 personal holding company tax and interest thereon of $2,466.23 for 1965. The plaintiff company paid these amounts to the District Director in Nashville, Tennessee, and filed claims for refund, which have not been disallowed, but more than six months elapsed between the filing of the claim for refund and the filing of this suit. This cause followed.
Since 1934, the Internal Revenue Code has imposed a surtax on the undistributed income of so-called "personal holding companies". To qualify as a personal holding company, a corporation must meet both the income test and a stock ownership test, viz., at least 60% of its "adjusted ordinary gross income" must be "personal holding company income" (primarily passive investment income); and more than 50% of its stock must be owned — directly or indirectly, actually or constructively — by five or fewer individuals.
Section 541 of the Internal Revenue Code of 1954 imposes the personal holding company tax on the undistributed personal holding company income of corporations which come within the definition of a personal holding company, which is contained in Section 542 of the Internal Revenue Code of 1954. In computing the undistributed personal holding company income, a deduction is permitted by Section 545(a) for dividends paid, as specified in Section 561, and Section 561 provides, among other things, that "* * * in determining the deduction for dividends paid, the rules provided in Section 562 * * * shall be applicable".
Section 562, in turn, provides that with certain limitations the term "dividend" shall include only dividends described in Section 316. Section 316(b) (2) (A) (ii) provides, in part:
"* * * The term `dividend' also means any distribution of property (whether or not a dividend as defined in subsection (a)) made by the corporation to a shareholder, to the extent of its undistributed personal holding company income (determined under section 545 without distributions under this paragraph) for such year."
The issues in this case can be resolved by a determination of the validity of Treasury Regulation 1.562-1(a), which provides in part as follows:
"* * * If a dividend is paid in property (other than money) the amount of the dividends paid deduction with respect to such property shall be the adjusted basis of the property in the hands...
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H. Wetter Manufacturing Company v. United States, 71-1725.
...validity of the regulation, granted the government's motion for summary judgment, and dismissed the taxpayer's complaint with prejudice, 330 F.Supp. 444. The sole issue presented on this appeal is whether a personal holding company, when distributing the stock of another corporation as a di......