World Pub. Co. v. United States

• Decision Date: 16 May 1947
• Docket Number: Civil Action No. 1830.
• Citation: 72 F. Supp. 886
• Parties: WORLD PUB. CO. v. UNITED STATES.
• Court: U.S. District Court — Northern District of Oklahoma

72 F. Supp. 886

WORLD PUB. CO. v. UNITED STATES.

Civil Action No. 1830.

District Court, N. D. Oklahoma.

May 16, 1947.

Breckinridge & Boone, of Tulsa, Okl. for plaintiff.

Whit Y. Mauzy, U. S. Atty., of Tulsa, Okl. for defendant.

BROADDUS, District Judge.

Jurisdiction.

1. This action is to secure a refund of income taxes paid to H. C. Jones, Collector of Internal Revenue for the United States within Oklahoma. As Jones was not the collector at the time the suit was filed, it was properly filed against the United States in the Northern District of Oklahoma. 28 U.S.C.A. § 41(20).

2. The first cause of action embraces a claim for a refund of income taxes paid by the plaintiff for the calendar year 1942, and the second for a refund of taxes paid for the calendar year 1943. In both years a deficiency tax was assessed and paid, and the taxpayer filed claim for refund on the respective sums paid, October 23, 1945. The Commissioner having failed to render a decision upon said claims for a period of over six months, this action was filed on June 6, 1946. As it was begun after the expiration of the period of six months, and within two years after the expiration of such period, the action may be maintained. 26 U.S.C.A. Int.Rev. Code, § 3772(a) (1) (2).

The World Publishing Company.

3. Stipulations filed by the parties as to a portion of the facts are hereby adopted. For a consideration of the questions presented, a portion of the stipulated facts will be rearranged and referred to in these findings with other facts determined herein.

4. The original name of the plaintiff was the World Publishing Company of Indian Territory. This name was changed to the World Publishing Company by charter amendment in 1913. For convenience, the "World Publishing Company" will be referred to from time to time as the "World" or the "Publishing Company." It was organized in 1906 with an authorized capital stock fully issued and paid of $25,000, consisting of 1000 shares of the par value of $25 per share. The capital stock was increased April 1, 1913 (about the time of Mr. Lorton's purchase of one-half of the stock in the Publishing Company), to 5000 shares of like par value, the increase of 4000 shares being a stock dividend. The capital stock was again increased on November 27, 1918 (after Mr. Lorton had acquired all the stock in the year 1917), to 12,000 shares of the same par value, the increase being 1800 shares as a stock dividend, 5199 3/5 shares for goodwill, press franchise, and subscription lists, and 2/5 of a share for cash.

5. The next increase was on September 12, 1922, wherein the stock was increased to 10,000 shares, at a par value of $100 per share. Of these shares, 3000 shares were issued for the 12,000 shares of outstanding stock, a stock dividend of 2750 shares was issued, and the remaining 4250 shares were issued for goodwill, press franchise, and subscription lists. The total authorized and issued capital stock was $1,000,000. Summarized, the consideration for the common capital stock was $25,010 in cash for 250.1 shares, $420,000 for stock dividends, and $544,990 for goodwill, press franchise, and subscription lists. The corporation was not formed for the purpose of preventing increased surtax on its shareholders.

6. The World at all times material to this action was owned and controlled by Mr. Eugene Lorton. At the time this suit was instituted, he was the owner of 9997 shares of the stock, his wife, Mrs. Maud Lorton, held one share, F. O. Larson one share, and N. G. Henthorne one share. Mr. Lorton acquired 50% of the outstanding capital stock of the Company in 1913, and in 1917 acquired the remaining outstanding stock.

7. The shareholders for the years 1942 and 1943 were the same as set out above. Maud Lorton was the wife of Eugene Lorton in 1913 when he acquired 50% of the stock, and that relationship has continued until the present time. Mr. F. O. Larson has been the business manager of the taxpayer for many years, and Mr. N. G. Henthorne has also been with the World and Mr. Lorton for many years in different capacities. The salaries paid the officers and directors for their duties in their respective positions in 1942 and 1943 are as follows: Mr. Eugene Lorton, $50,000, Mrs. Maud Lorton, $7,200, Mr. F. O. Larson, $16,100 and Mr. N. G. Henthorne, $16,100. The record discloses no loans or advances by the corporation to the shareholders.

8. By duly enacted laws of Congress surtax rates on the income of individuals were increased substantially for years under consideration here, as shown by the following table in which rates on surtax net incomes of $50,000 and $100,000 are taken as examples:

                Year to     Tax on $50,000   Per cent tax on         Tax on   Per cent tax on
                Which Tax                    excess between         $100,000  excess between
                Applies                      $50,000 and $56,000              $100,000 and
                                             for 1934-9                       $150,000
                                             and between
                                             $50,000 and $60,000
                                             for 1940-44
                1934, 1935    $ 7,700                30              28,000          52
                1936, 1937      7,700                31              30,000          58
                1938, 1939
                1940           11,780                44              36,780          58
                1941           19,380                52              49,780          65
                1942, 1943     23,240                66              59,140          79
                1944           26,820                75              67,320          89
                

9. If the World had paid out its earned surplus in dividends during the years 1942 and 1943, it would have increased the surtax liability of its owner, Mr. Lorton, the amount of $69,520.35.

10. The income returns of the Company filed with the Bureau of Internal Revenue were filed on the accrual basis in keeping with the practice of the Company. There were accumulations of earned surplus in both 1942 and 1943 from which dividends could legally have been declared and paid.

Conclusions of Law.

A. The Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 102, imposes a high surtax in addition to all other taxes upon corporations formed or availed of for the purpose of preventing the imposition of a surtax upon its shareholders through allowing earnings or profits to accumulate and not be distributed to its stockholders. The touchstone of liability under Sec. 102 is the purpose behind the accumulation of the income and not the consequence of the accumulation. Mertens, Federal Income Taxation, Sec. 40.08; DeMille v. Commissioner, 31 B.T.A. 1161, affirmed 9 Cir., 90 F.2d 12, certiorari denied 302 U.S. 713, 58 S.Ct. 32, 82 L.Ed. 551.

If there is an accumulation the purpose of preventing the imposition of a surtax upon shareholders may exist though the accumulation be not unreasonable for business needs (United Business Corporation v. Commissioner, 19 B.T.A. 809, 828, affirmed 2 Cir., 62 F.2d 754, certiorari denied 290 U.S. 635, 54 S.Ct. 53, 78 L.Ed. 552; Chicago Stock Yards Co. v. Commissioner, 41 B.T.A. 590, reversed, 1 Cir., 129 F.2d 937, reversed on other grounds, eo nomine Helvering v. Chicago Stock Yards Co., 318 U.S. 693, 63 S.Ct. 843, 87 L.Ed. 1086), or where there are other and more dominant motives (Helvering v. Chicago Stock Yards Co., supra; Trico Products Corporation v. Commissioner, 46 B.T.A. 346, affirmed 2 Cir., 137 F.2d 424, certiorari denied 320 U.S. 799, 64 S.Ct. 369, 88 L.Ed. 482), such as accumulations for anticipated expansion of the taxpayer's business. Whitney Chain & Mfg. Co. v. Commissioner, 3 T.C. 1109, affirmed 2 Cir., 149 F.2d 936; Trico Products Corp. v. Commissioner, supra; Semagraph Co. v. Commissioner, 4 Cir., 152 F.2d 62.

The testimony of interested witnesses of the purpose, motive or intent must be given consideration and accorded the weight to which it is entitled but it may be less persuasive than the surrounding circumstances. Helvering v. National Grocery Co., 304 U.S. 282, 58 S.Ct. 932, 82 L.Ed. 1346; R. L. Blaffer & Co. v. Commissioner, 37 B.T.A. 851, affirmed 5 Cir., 103 F.2d 487, certiorari denied 308 U.S. 576, 60 S.Ct. 91, 84 L.Ed. 469; Cecil B. DeMille v. Commissioner, supra. Circumstances bearing upon the question are:

(i) Substantial loans to controlling stockholders or to the sole owners.

(ii) The fact that the corporation could have been assured capital to meet its demands, including contemplated expansions, as well by a distribution of the earnings, profits and liquid reserve to the owner, the sole stockholder, as though such profits and earnings had been held in the corporate treasury. (Clearly this is so where all the stock except qualifying shares is owned by one stockholder. Helvering v. National Grocery Co., supra; Helvering v. Chicago Stock Yards Co., supra; and see Universal Steel Co. v. Commissioner, 5 T.C. 627; Southland Industries, Inc. v. Commissioner, 7 T.C. 1488; Semagraph Co. v. Commissioner, supra.)

(iii) The substantial increase under the law of surtax rates on income of individuals for the years 1942 and 1943 (United Business Corporation v. Commissioner, supra).

(iiii) An apparent increase in the surtax liability of the sole stockholder or controlling stockholders if the earnings and profits had been distributed out of surplus in dividends. Helvering v. National Grocery Co., supra; Trico Products Co. v. Commissioner, supra; Trico Products Corp. v. McGowan, D.C.N.Y., 67 F.Supp. 311; McCutchin Drilling Co. v. Commissioner, 2 T.C. 1269, affirmed 5 Cir., 143 F.2d 480. And

(iiiii) The fact that the corporation's owner had substantial income and did not need distribution of earnings from the corporation. Trico Products Corporation v. Commissioner, supra; Trico Products Corporation v. McGowan, supra.

However, the determination of the purpose need not rest on such circumstances alone.

Growth and Expansion of "The World Publishing Co."

11. In the beginning, the World published, owned and...