Willingham v. United States, 18381.

• Decision Date: 02 June 1961
• Docket Number: No. 18381.,18381.
• Citation: 289 F.2d 283
• Parties: A. C. WILLINGHAM, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

289 F.2d 283 (1961)

A. C. WILLINGHAM, Appellant, v. UNITED STATES of America, Appellee.

No. 18381.

United States Court of Appeals Fifth Circuit.

April 20, 1961.

As Corrected on Denial of Rehearing June 2, 1961.

Joe G. Fender, Gordon J. Kroll, Houston, Tex., Eastup & Kroll, Houston, Tex., of counsel, for appellant.

Randolph F. Wheless, Jr., Asst. U. S. Atty., William B. Butler, U. S. Atty., Houston, Tex., for appellee.

Before TUTTLE, Chief Judge, BROWN, Circuit Judge, and CLAYTON, District Judge.

TUTTLE, Chief Judge.

This appeal from a conviction in a prosecution for an attempt to evade income tax presents the question whether the trial court erred in preventing the accused from showing that no taxes were due for the two prosecution years. The appellant does not here contest the sufficiency of the evidence to sustain a jury's verdict of guilty, based on testimony that he had wilfully set up fictitious expense deductions on the books of the company of which he was president, unless he is to be permitted to reconstruct the income for the years 1952 and 1953. There was undisputed evidence that the false and fictitious entries resulted in defeating the government in collecting part of the tax shown on the return to be due during these years.

What the appellant does assert is that he was entitled to prove that the true tax liability of the corporation for the years 1952 and 1953 should be arrived at by reconstructing the returns for these years after giving effect to substantial loss carry-overs from the years 1949 and 1950.

The government's principal reliance in objecting to proof tendered by appellant below of the amount of loss carry-overs is that these loss carry-overs are not available to appellant's corporation because the government says the corporation is "not the same taxpayer" as that which suffered the losses because the corporation went through a Chapter X Bankruptcy Act (11 U.S.C.A. § 501 et seq.), reorganization subsequent to the losses sought to be carried forward.

For several years prior to November 20, 1950, Gulf Southwestern Transportation Company, Inc., was engaged in the business of a truck carrier operating under a certificate of public convenience and necessity issued by the Interstate Commerce Commission. We take it as true for the purpose of this appeal that during the years 1949 and 1950 it suffered substantial losses, as it had in prior years. This resulted in the filing of a petition for reorganization in the bankruptcy court by the corporation. This was followed by the filing of a plan of reorganization which was finally accepted and made operative by an order of the District Court, November 20, 1950. Under this plan of reorganization, the corporate shell remained and its I.C.C. certificates continued to be effective although its capital structure was somewhat modified in that the plan called for the surrender of the stock by minority stockholders and the retention by one Culbertson of his stock; this stock was to be purchased by A. C. Willingham, the appellant here. Willingham was to pay a sum which Culbertson agreed would be used to pay certain preferred claims against the corporation and to pay a percentage of other claims, including the United States Government's claim for taxes and to pay 10% on the claims of ordinary unsecured creditors. This, of course, amounted to a donation to capital. All other debts of the corporation were wiped out under the plan of reorganization. There was a further partial modification of the capital structure of the corporation in the provision in Willingham's contract to purchase the stock which required him to "cause" the corporation "to assign to Culbertson * * * 5% of the gross revenues of such corporation", such amount to represent a minimum payment which Willingham agreed to make in payment of the purchase price for the stock. It is to be noted that this payment was to be made whether or not there were any profits in the operation, and thus were to be made even though they impaired the capital of the corporation.

Willingham was elected President and took complete charge of the corporation's operation. The corporation's income tax return for the period of November 20 through December 31, 1950 showed a loss of $736.93. The corporation income tax return for the entire calendar year 1950 showed a loss of $28,490.87, of which $27,753.94 represented losses incurred prior to the reorganization. Proof offered by the appellant was to the effect that the 1949 operation showed a net loss of $46,079.36. It was the taxpayer's contention that this figure could, under existing provisions of the 1939 Internal Revenue Code be carried forward to 1952, and when this was done it would wipe out completely any income for that year. Then, by carrying forward the net loss of $28,490.87 of 1950 to the year 1953, this would also eliminate any deficiency in taxes for that year.

When the appellant sought to tender evidence touching on the net loss for the years 1949 and 1950, prior to the reorganization, government counsel objected on the ground that these net losses could not be applied to determine the tax liability of the corporation resulting from its operations subsequent to the reorganization. The trial court sustained this objection, but by agreement with counsel provided a means by which a proffer of proof could be made in order that the correctness of the court's ruling could be adequately presented on appeal.¹

It is undoubtedly true, as the trial court held in this case, that conviction under Section 145(b) of the Internal Revenue Code of 1939, 26 U.S.C.A. (Internal Revenue Code of 1939 as amended) 145 (b) cannot be supported in the absence of a showing that the government was due a tax in excess of that reported. Koontz v. U. S., 5 Cir., 277 F. 2d 53. As stated in Mertens Law of Federal Income Taxation, Section 55, 37:

"A prosecution for wilful failure to file a return may be maintained where there is no tax due. But no prosecution for wilful attempt to evade or defeat a tax is possible unless there is some tax due."

The government does not contest the correctness of this proposition. It says that on the record here before the court there is no evidence or proffer of proof which would permit a jury to find that the tax due by the corporation is anything other than as reported in its income tax returns for 1952 and 1953 as modified by the proven falsities touching on the fictitious deductions.

The parties present a difficult question when they ask whether a corporation whose debts have all been wiped out by a Bankruptcy Act reorganization is nevertheless "the same taxpayer" which the terms of the carry-over provision of the Internal Revenue Code say can carry forward the losses which created the forgiven debts in order to wipe out income for tax purposes in future years.

The appellant strongly relies on New Colonial Ice Co., Inc. v. Helvering, 292 U.S. 435, 54 S.Ct. 788, 791, 78 L.Ed. 1348 where in a reorganization proceeding, a new corporation took over the business and the court held that this new corporation was not the same taxpayer and was not entitled to the loss carryover under a somewhat similar earlier statute. Appellant stresses particularly the language of the Court, "Its words are plain and free from ambiguity. Taken according to their natural import they mean that the taxpayer who sustained the loss is the one to whom the deduction shall be allowed." The appellant points out that in the present case this is unquestionably the same corporate person that sustained the loss prior to reorganization and the case thus fits neatly within the language of the act as applied by the Supreme Court. Of course, there the taxpayer sought to carry the loss over from one corporation to a new corporate entity which was alleged to be in substance the same taxpayer. In denying the right to do so, the court used the language quoted above. Here, the contention is made that, even though greatly changed in substance following the tax loss years the identity of the corporate entity after the reorganization with that before satisfies the requirement.

The government contends that conceptually this is not the same taxpayer, because, although the corporate shell remains the same, the structure is entirely different and the new sole owner of the entire stock of the company has so identified himself with the corporate taxpayer, both by the obligation he undertook touching on the withdrawal of funds from the company, regardless of income, and because of his complete domination and management, as to make it in substance, though not in form, a separate taxpayer. Principal support for the government's theory is found in Libson Shops, Inc. v. Koehler, 353 U.S. 382, 77 S.Ct. 990, 993, 1 L.Ed.2d 924, in which the "continuity of business enterprise" is made the test. In Libson the court found it unnecessary to decide whether the corporate identity principle controlled, because the court found that there was a lack of continuity of a single business enterprise. There the post-merger corporation which had been the parent of sixteen separate operating companies sought to carry forward losses suffered by three of the operating companies to offset profits earned subsequent to the merger. To be sure, the taxpayer corporation...