Williams Inv. Co. v. United States

• Decision Date: 10 April 1933
• Citation: 3 F. Supp. 225
• Parties: WILLIAMS INV. CO. v. UNITED STATES.
• Court: U.S. Claims Court

3 F. Supp. 225

WILLIAMS INV. CO. v. UNITED STATES.

L-307.

Court of Claims.

April 10, 1933.

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Edwin S. Mack and Frederic Sammond, both of Milwaukee, Wis., and Paul F. Myers, of Washington, D. C. (Miller, Mack & Fairchild, of Milwaukee, Wis., and Williams, Myers & Quiggle, of Washington, D. C., on the brief), for plaintiff.

Charles B. Rugg, Asst. Atty. Gen. (George H. Foster, of Washington, D. C., on the brief), for the United States.

Before LITTLETON, WILLIAMS, WHALEY, and GREEN, Judges.

LITTLETON, Judge.

Plaintiff was organized in October, 1922, a short time before the extra dividend of $500,000 was declared and paid by the Journal Company of which L. W. Neiman was the principal stockholder. Plaintiff received Nieman's share of the dividend of $142,000 in 1922, and it received further dividends declared and paid upon the stock of the Journal Company of $163,000 in 1923, $26,000 in 1924, $163,000 in 1925, $300,000 in 1926, and $400,000 in 1927. It also received dividends on stocks of other corporations of $1,900 in 1923, $1,920 in 1924, $26,550.25 in 1925, and $5,976 in 1926. The remainder of its income consisted of interest securities owned. Inasmuch as these dividends were received by plaintiff from domestic corporations they were not subject to tax under section 234 (a) (6) of the Revenue Acts of 1924 and 1926, 26 USCA § 986 (a) (6).

During the years 1922 to 1926, inclusive, involved in this case, L. W. Neiman, who through his ownership of all the plaintiff company's stock, which in turn owned the stock of the Journal Company, had, as reported in his income-tax returns, a net income of $26,000 for 1924, $36,000 for 1925, and $60,000 for 1926, upon which he paid a tax of $1,697.71, $2,643.38, and $5,664.30, respectively. The income of Nieman for these years, with the exception of 1926 when the plaintiff declared and paid him a dividend of $25,000, consisted almost wholly of his salary from the Journal Company.

Plaintiff had no paid employees. It paid no salaries to its officers, except in 1926, when it paid a total of $1,000 for officers' salaries. The company declared no dividends from 1922, the year of its incorporation, to 1926. In the last-mentioned year it declared a dividend of $25,000. At that time it had a surplus of $822,916.78. It declared no dividends in 1927, at the end of which year it had a surplus of $1,380,340.63. The sole business of the plaintiff was the holding of stocks and securities transferred to it by L. W. Nieman and the reinvestment of income therefrom. Nieman organized the plaintiff for this purpose and also for the purpose of accumulating funds sufficient for the purchase of the minority stockholdings of Harry J. Grant in the Journal Company. Grant became a member of the Journal Company in 1919 and in 1922 owned 20 per cent., or 400 shares, of the stock of that company. When he purchased this stock in 1919, he expected to pay for it largely from the dividends to be declared by the Journal Company. The Journal Company had been prosperous and had established the policy of declaring a fixed dividend of, first, $24,000 a year to and including 1918 and thereafter $48,000 a year. The annual net earnings of the Journal Company increased very materially from 1916 forward (finding 10). Since 1919 the company had contemplated an increase in its plant facilities and in 1922 the officers of the corporation contemplated that such changes would involve an expenditure of approximately $500,000. The increase in the plant facilities was completed in 1924 at a cost considerably in excess of the previous estimate. During this period the Journal Company continued to pay its regular annual dividend of $48,000, and in 1922, at the request of Grant, it declared and paid an additional dividend of $500,000. The increased facilities were paid for from current receipts, without borrowing or additional capital.

In 1928 the Commissioner of Internal Revenue held and decided that plaintiff came within the provisions of section 220 of the Revenue Acts of 1924 and 1926 (26 USCA § 961 note), and assessed a tax of $283,387.42 upon its entire net income for the years 1924, 1925, and 1926, which, together with interest of $50,745.38, totaling $334,132.80, was paid September 30, 1929. Claims for refund for each year were filed and rejected, and this suit was timely instituted.

Plaintiff contends that it was not formed or availed of for the purpose of preventing the imposition of the surtax upon its stockholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, and that it did not permit its gains or profits to accumulate beyond its reasonable needs. From a consideration of the statute and the evidence of record, we are of opinion that the plaintiff was formed and availed of for the purpose of preventing the imposition of the surtax upon its stockholders by permitting its gains and profits to accumulate instead of being distributed, and have so found.

The sole business of plaintiff was the holding of stock of the Journal Company and other companies and the securities transferred to it by L. W. Nieman, who had theretofore been the majority stockholder of the Journal Company, and the reinvestment of the income received therefrom. We think the plaintiff was not only formed for the purpose of preventing the imposition of surtax upon its sole stockholder, but that it was availed of by him for that purpose. The fact that Nieman also had in mind the purpose of having plaintiff accumulate funds sufficient for the purchase of Grant's minority stockholdings in the Journal Company, should the opportunity arise, cannot prevent the application of section 220 for the reason that it has not been shown that there was any necessity for that policy of the plaintiff and for the further reason that a purpose to accumulate a fund made up in large measure of the amount of surtaxes avoided through the accumulation of dividends paid to the holding company which would otherwise have been subject to the surtax, had that been paid to Nieman, comes within the spirit of section 220, especially when such purpose is so closely coupled with the main or principal purpose of preventing the imposition of surtax upon the stockholders of the holding company. All that Nieman accomplished by having the dividends of the Journal Company and certain other corporations paid to the plaintiff, a holding company, instead of to himself, was the saving in the amount of surtax which he would otherwise have had to pay. The argument that Nieman was failing in health and vigor and that, for this reason, the plaintiff was organized to accumulate a fund sufficient for the acquisition of additional stock in the Journal Company does not, in our opinion, prevent the application of section 220. Upon Nieman's death his stock in the plaintiff would pass to his widow, or such persons as he might designate by will, in the same manner as any moneys, properties, or securities owned by him had the dividends and interest received by the plaintiff been paid to him instead of to it. Whoever should have received Nieman's stock in the plaintiff company, had he died during the period here involved, could have used it or disposed of it in the same way as they could have used or disposed of any other money or property left by him. A mere purpose on the part of the corporation in accumulating funds is not sufficient to place the case beyond the reach of section 220 unless such purpose is supported by the needs of the business and we cannot see that the determination or establishment of such needs would be any more difficult than the determination of many other questions arising under the various revenue statutes.

It is next contended that section 220 violates the Tenth Amendment of the Constitution of the United States in that it constitutes an attempt by Congress under the guise of tax to exercise a power not delegated to the United States but one reserved to the states; that the regulation of the affairs of corporations which are chartered by states is reserved to state Legislatures; and that all discretion on declarations of dividends has been committed to boards of directors by the Wisconsin Legislature and responsibility and liability therefor have been fixed upon them.

The statute in question is strictly a revenue act and its sole purpose is to raise revenue. The amount imposed and authorized to be collected, when the circumstances are such as to make the provisions of the section applicable, is imposed and designated as a tax. If viewed as a penalty, it is but the employment of one of the effective means to collect revenues. The section was enacted as a necessary aid to the effective enforcement of the powers clearly within the power of Congress, and we think the cases of Bailey v. Drexel Furniture Co., 259 U. S. 20, 42 S. Ct. 449, 66 L. Ed. 817, 21 A. L. R. 1432, known as the Child Labor Tax Case, and Hill v. Wallace, 259 U. S. 44, 42 S. Ct. 453, 66 L.Ed. 822, are not applicable here. See Alston v. United States, 274 U. S. 289, 47 S. Ct. 634, 71 L. Ed. 1052; Nigro v. United States, 276 U. S. 332, 48 S. Ct. 388, 72 L. Ed. 600.

It is also urged that by imposing such a high tax for failure to distribute earnings the corporations would be coerced into distributing their earnings and thus all regulation of the conduct of business, essentially a state power, is effected. We think this result does not follow from the statute, but if the effect of the law be as urged the control of the business is no greater in this case than to compel a corporation to disclose its invested capital, gross income, expense of doing business, indebtedness, and net earnings, and to make such reports public records.

It was urged in Flint v. Stone Tracy Company, 220 U. S. 107, 31 S. Ct. 342, 359, 55 L....