World Pub. Co. v. United States

• Decision Date: 26 August 1948
• Docket Number: No. 3571.,3571.
• Citation: 169 F.2d 186
• Parties: WORLD PUB. CO. v. UNITED STATES.
• Court: U.S. Court of Appeals — Tenth Circuit

169 F.2d 186 (1948)

WORLD PUB. CO. v. UNITED STATES.

No. 3571.

Circuit Court of Appeals. Tenth Circuit.

July 15, 1948.

Rehearing Denied August 26, 1948.

Byron V. Boone, of Tulsa, Okl. (Dickson M. Saunders, of Tulsa Okl., on the brief), for appellant.

Melva Graney, of Washington, D. C. (Theron Lamar Caudle, Asst. Atty. Gen., Sewall Key, Robert N. Anderson and Lester L. Gibson, Sp. Assts. to the Atty. Gen., and Whit Y. Mauzy, U. S. Atty, of Tulsa, Okl., on the brief), for appellee.

Before PHILLIPS, BRATTON and HUXMAN, Circuit Judges.

HUXMAN, Circuit Judge.

Section 102 (a) of the Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, § 102 (a), imposes an additional tax upon a corporation formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders or the shareholders of any other corporation through the medium of permitting earnings or profits to accumulate instead of being divided or distributed; and Section 102 (c), 26 U.S.C.A.Int.Rev. Code, § 102(c), provides that the fact that earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid surtax on shareholders unless the corporation shall prove to the contrary by a clear preponderance of the evidence.

The Commissioner of Internal Revenue assessed additional taxes against the World Publishing Company, herein called the taxpayer, under the above Section for the years 1942 and 1943. The tax was paid, and a timely claim for a refund thereof was denied. A suit for its recovery was thereupon filed in the United States District Court for the Northern District of Oklahoma. The taxpayer has appealed from an adverse judgment.

The taxpayer, a corporation, publishing the Tulsa World, a daily newspaper in Tulsa, Oklahoma, was organized in 1906 with an original capital of $25,000.00. Through subsequent increases, its capital stock, as of December 31, 1943, stood at $1,000,000.00, consisting of 10,000 shares. Eugene Lorton, the president, owns 9,997 of these shares; his wife, Maud Lorton, owns one share; F. O. Larson, an employee, owns one share; and N. G. Henthorne, an employee, owns the remaining share. These parties have been the directors of the taxpayer since 1917.

The trial court made comprehensive findings of fact and conclusions of law. See World Publishing Company v. United States, D.C., 72 F.Supp. 886, 889. The trial court applied correct principles of law. Thus the court said: "The touchstone of liability under Sec. 102 is the purpose behind the accumulation of the income and not the consequence of the accumulation." The trial court correctly pointed out that the tax may be imposed, even though the accumulation is not unreasonably large, and under proper conditions may not be imposed although there is accumulated more than is reasonably necessary for business needs. The court also recognized that, while the Commissioner's determination is presumptively correct and casts upon the taxpayer the burden of offering evidence in opposition thereto, once such evidence is presented the presumption of correctness disappears and the question then is whether under all the evidence the taxpayer has sustained the burden placed upon him by the applicable law. Our decision then turns upon whether the finding by the trial court that the taxpayer accumulated earnings beyond the reasonable needs of the business finds support in the evidence, and if so, whether the taxpayer has sustained the burden which Section 102 (c) then places upon it to overcome the effect thereof.

As in all such cases, decided cases are not decisive and have comparative value only. In footnote number one,¹ we have assembled a list of cases in which a finding under somewhat related facts that the corporation was availed of for the purpose of preventing the imposition of the tax was sustained; in footnote two,² we have assembled a list of cases which on somewhat related facts have reached a contrary conclusion. For obvious reasons, no analysis of these cases will be attempted in this opinion. The applicable principles of law are clear and in the end the decision in this case must rest upon its own peculiar facts and circumstances.

The taxpayer occupies an enviable financial status.³ Thus it will be seen that in 1941, the net earnings and profits were $12,636.93, and the earned surplus was $562,521.98. In 1942, the net earnings had risen to $80,540.28, and the surplus was $643,062.26. In 1943, the net earnings increased to $96,564.21, and the earned surplus to $739,626.47. The total assets had increased from $1,570,166.29 in 1941, to $1,595,883.13 in 1942.

The taxpayer's paper grew from a small paper with a circulation of 7,000 to a present daily circulation of 70,000 and a Sunday circulation of 110,000. In 1917, it constructed a five-story building and installed large presses. In 1927, it added four stories to its building. The presses installed in 1917 were used presses and were reconditioned in 1927. On December 12, 1939, the directors set up a reserve of $250,000.00 for the purchase of new printing presses and the acquisition of a lot and building suitable for installing such presses. In 1940, the taxpayer purchased land adjacent to its building for $60,000.00, and announced that a new building would be erected. In July, 1941, a corporation under the name of the Newspaper Printing Corporation was formed. One-half of its stock was issued to the taxpayer and the other half to the Tulsa Tribune Company, publisher of the Tulsa Tribune, a competing paper in the City of Tulsa. From that time on, the Printing Corporation printed both papers, using taxpayer's mechanical plant, and the Tribune moved its office into the taxpayer's building.

It had been the settled practice of taxpayer throughout its history to finance its expansion and its mechanical equipment from earnings. The only loan ever executed by it was one of $50,000.00, in 1927, made to complete the additional four stories to its building.

At the meeting of the Board of Directors on December 21, 1942, a resolution was adopted setting aside an additional $150,000.00 for presses and accessory equipment, and $100,000.00 for the construction of the new building, and authorizing the President to proceed with plans for the purchase of new equipment. The war ensued and the purchase of the presses and the construction of the building were temporarily rendered impossible.

Under the arrangement with the Tribune, it was agreed that the Tribune was to pay one-half of the cost of the presses and accessory equipment, but there was some doubt about its ability to meet this commitment and it was perhaps necessary that taxpayer be prepared to advance the full cost of the presses and accessory equipment. At the end of 1942, the estimated cost of the building was $150,000.00, and the anticipated minimum cost of new presses and accessory equipment was $350,000.00.

The trial court's findings that the accumulation of the 1942 and 1943 surplus profits was in excess of the reasonable needs of the business, and that the taxpayer had failed to overcome the statutory presumption arising therefrom, are binding upon us if they find support in the record. Whether the accumulated reserves exceeded the reasonable needs of the business cannot be determined from a consideration of a single factor. It is necessary to consider and view all of the facts and circumstances in the light of the setting of the taxpayer in question. The factors which the court considered in reaching its conclusion are set out concisely and clearly in its detailed findings of fact as reported in 72 F.Supp. 886, and we concur therein. No useful purpose would be served by repeating in detail what is so clearly stated in the court's findings. It is significant that the accumulated earned surplus upon the taxpayer's books as of December, 1941, was greater than the estimated minimum cost of the new presses, accessory equipment and of the building, as also is the fact that the Tulsa Tribune Company was chargeable with one-half of the cost of the presses and accessory equipment. While there was evidence that the Tulsa Tribune Company was not presently able to meet its one-half of this obligation and that the taxpayer would perhaps be required to advance such share of the cost, the Tulsa Tribune Company's liability for its share of such costs is nevertheless pertinent in considering whether the reserves accumulated by the taxpayer were beyond the reasonable needs of its business. It is agreed that at the time these reserves were set up, the contemplated improvements could not be made on account of the war. No one knew when they would be made. It was reasonable to assume that a number of years would ensue. During this time the financial status of the Tulsa Tribune might well be expected to improve and the prosperous condition of the taxpayer to continue; and further earnings could, no doubt, be expected.

The minutes of the Directors' meeting of December 21, 1942, and other testimony upon the possibility of a diminution of profits was offered to establish the reasonableness of the reserves in question. But, if, as pointed out by the court, no further profits would be required because the reserves already exceeded the estimated cost of the contemplated improvements, such testimony has very little probative value. At most, it is but one of the factors to be considered. The court also pointed out that since the arrangement between the two publishing companies, taxpayer's profits had greatly increased notwithstanding high war time taxes. While it is not required that the reserves be spent in the year in which they are created, so long as there is a present need for the expenditure,⁴ the fact that they could not be spent for a number of years during which additional earnings might be expected, in the light of taxpayer's financial history, is a relevant factor to be considered. All...