WH Armston Co. v. Commissioner of Internal Revenue

• Decision Date: 25 April 1951
• Docket Number: No. 13227,13228.,13227
• Citation: 188 F.2d 531
• Parties: W. H. ARMSTON CO., Inc. v. COMMISSIONER OF INTERNAL REVENUE. ARMSTON v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

188 F.2d 531 (1951)

W. H. ARMSTON CO., Inc. v. COMMISSIONER OF INTERNAL REVENUE.

ARMSTON v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 13227, 13228.

United States Court of Appeals Fifth Circuit.

April 25, 1951.

Warren F. Wattles, Jacksonville, Fla., for petitioners.

Abbott M. Sellers, Sp. Asst. to Atty. Gen., Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack, Sp. Asst. to Atty. Gen., Charles Oliphant, Chief Counsel, Bureau of Internal Revenue, Bernard D. Daniels, Sp. Atty., Bureau of Internal Revenue, Helen Goodner, Sp. Asst. to Atty. Gen., Maryhelen Wigle, Sp. Asst. to Atty. Gen., Washington, D. C., for respondent.

Before HOLMES, McCORD and STRUM, Circuit Judges.

McCORD, Circuit Judge.

These two cases present substantially similar issues of law and fact, and since they were consolidated by the Tax Court for hearing and disposition, 12 T.C. 539, we will accord them like consideration here.

Together the appeals involve corporate income, declared value excess profits, and excess profits taxes for the calendar years 1943 through 1945 in the aggregate amount of $74,749.37, and individual income taxes for the year 1943 in the sum of $15,041.02.

The principal question in the appeal involving the corporate taxpayer is whether the Tax Court properly held that a purported sale by W. H. Armston Company, Inc., in 1943 of certain equipment to the individual taxpayer, Catherine G. Armston, and her lease of the equipment back to the company at a certain rental, should be disregarded as a subterfuge for income tax purposes, so as to constitute the amounts paid as "rentals" for the equipment actually and in fact distributions of corporate earnings, rather than allowable deductions as ordinary and necessary business expenses under the provisions of Section 23(a) (1) (A) of the Internal Revenue Code, as amended, 26 U.S.C.A. § 23(a) (1) (A).

The main question presented by the appeal involving the individual taxpayer, Catherine G. Armston, is whether the Tax Court correctly found that the "rentals" received by her on the equipment during the tax years in question actually constituted corporate dividends taxable to her individually, as chief stockholder in the W. H. Armston Company, or whether they were deductible business expenses of the corporate taxpayer.

The material facts, briefly stated, reveal that W. H. Armston Co., Inc., is a Florida corporation organized September 29, 1930, and is principally engaged in construction work. W. H. Armston is president and treasurer of the Company, and his wife, Catherine G. Armston, is secretary.

During the tax period involved, Catherine G. Armston had no independent income of her own, other than a small salary, which she received from the Company. She was primarily a housewife, and performed only nominal duties for the Company. The papers which she signed as secretary of the Company were prepared by her husband for her signature, and whatever she did on behalf of the Company was on the advice of her husband. She had no authority to sign checks for the Company.

During the years 1940, 1941 and 1942, the Company purchased certain heavy equipment for use in its construction work which was very expensive. At that time it was engaged in a large amount of war construction for the government, which consisted mainly in clearing and building air fields in Florida for the Army engineers.

On February 1, 1943, at a special meeting of the board of directors of the Company, the president, W. H. Armston, called attention to the fact that although the company had enjoyed a good business year with respect to earnings from war construction projects, it was not good business for the company to have substantially all of its capital and surplus tied up in heavy fixed equipment when funds were needed for the payment of current debts and capital was required for payrolls on current and new business; that in view of current liabilities, and the large investment in fixed equipment, the Company might be embarrassed for want of ready cash, and for that reason some of the equipment should be sold and the cash realized therefrom be used as working capital. Accordingly, an offer was made by Catherine Armston whereby she agreed to purchase certain pieces of the heavy construction equipment owned by the Company, the price to be determined by the Company's book value as of February 1, 1943, provided the Company would agree to rent the same equipment back from Catherine Armston when it was needed for construction work. The rental rates were to be governed, under the terms of the agreement, by the ceiling price for the use of such equipment set by the O.P.A. After some discussion, the board of directors of the Company voted to accept the offer of Catherine Armston to purchase the equipment at a price of approximately $30,000.00, and authority was granted to her husband, W. H. Armston, to work out the details of the sale and the lease of the equipment back to the Company. W. H. Armston and his wife, Catherine Armston, then owned virtually all of the stock in W. H. Armston Company, Inc.

At the time of the above arrangement, the Company owned the equipment transferred, and owed very little on its remaining equipment. The purchase price of the equipment under the purported sale was later changed to $33,667.36. On the date of the transfer the equipment was worth considerably more than this O.P.A. ceiling price.

It was...