Whitney Chain & Mfg. Co. v. Comm'r of Internal Revenue
| Decision Date | 19 July 1944 |
| Docket Number | Docket No. 112621. |
| Citation | 3 T.C. 1109 |
| Parties | THE WHITNEY CHAIN & MFG. COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner failed to distribute approximately $70,000 of its current earnings, claiming that the amount was needed to finance a proposed expansion of its facilities, and at the same time had loans outstanding to stockholders in the form of noninterest-bearing notes in the amount of $347,800, and an investment in an unrelated corporation in the amount of $381,800. Held, on the facts, the petitioner was availed of in the taxable year for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its earnings or profits to accumulate, instead of being divided or distributed. Henry L. Shepherd, Esq., for the petitioner.
M. L. Sears, Esq., for the respondent.
This proceeding is to test the correctness of respondent's determination of a deficiency in income tax for the year 1939 in the amount of $17,611.81. The sole issue is whether the petitioner was availed of during the year 1939 for the purpose of preventing the imposition of surtax upon its shareholders through the medium of permitting earnings or profits to accumulate instead of being divided or distributed. Some of the facts have been stipulated by the parties and others are covered by testimony of witnesses and by the introduction of exhibits.
The petitioner is a corporation of the State of Connecticut, having its principal place of business in Hartford. Its income and excess profits tax return for the year 1939 was filed with the collector of internal revenue for the district of Connecticut.
The petitioner is an operating company engaged in the manufacture and sale of chains and sprockets used in the transmission of power, and keys and cutters used in metal-working operations. In addition, the petitioner since 1940 has been engaged in the manufacture of various component articles of materials of war, and it is now wholly engaged in war work.
During the year 1939 the petitioner had outstanding capital stock of 15,000 shares, par value $100 per share. Of this amount, 3,693 shares were held as treasury stock, having been purchased in 1936 from an erstwhile stockholder in settlement of a dispute over policy. The remaining shares, with the exception of directors' qualifying shares, were held by 5 persons, the wife and children of C.E. Whitney, who had been, prior to his death in 1933, president of the corporation and owner of approximately 75 percent of its stock.
For the calendar year 1939 the petitioner had section 102 net income in the amount of $138,289.23, and paid dividends of $67,842.00. These dividends were at the rate of $6 per share. The sum of $70,447.23 was retained as undistributed net income.
The petitioner's board of directors was composed of Robert Stevens, chairman, who was president of the J. P. Stevens Co., textile brokers of New York, a director of the Federal Reserve Bank of New York and of the American Telephone & Telegraph Co., and a trustee of the Metropolitan Life Insurance Co.; William J. Gallon, who was vice president and general manager of J. P. Stevens Co., and a director and overseer of the operations of 27 operating mills; Thomas Hewes, a lawyer; Leon B. Reed, a vice president of petitioner; Einar A. Hanson, a vice president of petitioner; W. H. Whitney, president of petitioner; and Park C. Boyd, secretary-treasurer of petitioner.1
Only one of the directors, W. H. Whitney, was a stockholder of petitioner at the time it was decided to retain a part of the year's earnings. He owned approximately 3 percent of petitioner's stock, and devoted his full time to the affairs of petitioner and the Hanson-Whitney Machine Co.
In 1939 the directors were of the opinion that the United States would become involved in the war in which a large part of Europe was already engaged. They anticipated an acceleration of their business in consequence of war work, and planned an expansion and renovation of the plant and equipment. The equipment had not been kept in a proper state of repair, and much of it had become antiquated and would have to be replaced to put the petitioner in a competitive position. A considerable sum of money would be necessary to finance the expansion and renovation. The directors also felt that it would be necessary to expand a certain plant owned by the petitioner and leased to the Hanson-Whitney Machine Co., in which company the petitioner owned a 75 percent stock interest.
The following are the balance sheets of the petitioner for the years 1938 and 1939.
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