Source: http://www.openjurist.org/224/f2d/483/brewing-corporation-v-commissioner-of-internal-revenue
Timestamp: 2017-07-20 20:41:00
Document Index: 487694051

Matched Legal Cases: ['§ 710', '§ 400', '§ 403', '§ 5400', '§ 5401', '§ 3802', '§ 4605', '§ 400']

224 F2d 483 Brewing Corporation v. Commissioner of Internal Revenue | OpenJurist
224 F. 2d 483 - Brewing Corporation v. Commissioner of Internal Revenue HomeFederal Reporter, Second Series 224 F.2d.
224 F2d 483 Brewing Corporation v. Commissioner of Internal Revenue 224 F.2d 483
A B C BREWING CORPORATION (formerly Aztec Brewing Co.), a corporation, Petitioner,
Total assets &#x2014; $1,540,321.67; Total liabilities, &#x2014; $1,540,321.67. The items which went to make up these items are not important. However, it is well to note that the corporation listed as cash on hand $11,476.72, and cash deposited in the Bank of America, $554,791.02, or a total of $566,267.74. The inventory cost of finished stock and containers, beer in storage, raw material and supplies totaled $363,411.05. The plant and equipment were listed, after deducting reserve for depreciation, at $386,460.42. As of October 31, 1944, the assets had been reduced to: Cash $107,158.61, United States Treasury obligations, $143,172.23, or a total of $250,330.84. The liabilities as of October 31, 1944, consisted chiefly of accrued taxes, accrued expenses, unrealized profit on excess profits tax bonds, and earned surplus, which, after various deductions, reduced the liabilities to $250,330.84. The details do not concern us in this review. The balance sheets as of October 31, for the years 1945 and 1946 were:
Assets               1945         1946
Cash             $ 1,498.11    $15,299.58
Obligations     13,172.23     10,000.00
Total Assets      14,670.32     25,299.58
Gross Income             1945           1946
Obligations          $  582.00
Recoveries on bad
debts                   256.00       $150.00
Refund on Calif.
franchise tax                         204.12
________       _______
Total income        838.00        354.12
Capital stock tax          62.50
tax                  12,621.34         21.25
Collection fee on
debt recoveries          30.00
_________        ______
Total deductions       12,713.84         21.25
or (loss)          $(11,875.84)      $332.87
"The purpose of the excess profits tax law was, of course, to absorb by taxation most of any abnormal profits which the stimulation of business by the war might bring to corporations. Excess profits were those in excess of the average profits of certain prewar years, and in excess of a specified return on invested capital. But, in order to prevent the undue hardship which might result from taking by taxation practically all abnormal profits while maintenance and upkeep expenses were having to be deferred because of shortages and wartime restrictions, leaving plants run down and no reserves to restore them, Congress in 1942 enacted section 710(c) (3) (A) of the Internal Revenue Code, 26 U.S.C.A., § 710(c) (3) (A), providing for the carry-back of any unused excess profits tax credit to cancel out excess profits taxes incurred for the two preceding years. This meant, as we understand it, that if a corporation having had excess profits in a given year, in a later year had less than normal profits, measured by the prewar standard formula, it could carry this deficiency in profits back to balance its excess profits for one or both of the two preceding years. When, in 1945, Congress repealed the excess profits tax law, it thought that it was fair to continue, for the year 1946, the averaging out process embodied in the carry-back provision, so it left that provision in effect for the year 1946." Aluminum Products Co. v. United States, 101 F.Supp. 373, 375, 121 Ct.Cl. 187.
The determination of this problem turns upon the proper application of the law to the Findings of the Court and the undisputed facts already set forth as to the status of the corporation. In effect, the Tax Court found that the taxpayer, upon a voluntary dissolution under California law, agreed to by the stockholders on March 7, 1944, there was a transfer to the stockholders on April 1, 1944, of $750,000.00 book value of assets, and that since March 31, 1944, the corporation has not engaged in the brewery business. The proceeding for voluntary dissolution without court intervention conformed to the law of California as it then stood. California Civil Code, 1935 ed., §§ 400a, 401, 401a, 401c, 402, 403b. The proper resolution was adopted, but the certificate required to be filed with the Secretary of State certifying the complete winding up of the corporation was never filed. California Civil Code, § 403c. Under the law as it then read, the notice to wind up "is a notice of intended cessation of business but is not a dissolution of the legal entity of the corporation". Bank of Alameda County v. McColgan, 1945, 69 Cal. App.2d 464, 472, 159 P.2d 31, 35. Only the certificate that the corporation "`has been completely wound up'" is "a formal end of corporate existence". Bank of Alameda County v. McColgan, supra, 69 Cal.App.2d at page 472, 159 P.2d 31, at page 35. When the winding up has been completed by this process, the corporation "ceases to exist". Stubbs v. Jones, 1953, 121 Cal.App.2d 218, 223, 263 P.2d 100, 103.
Unlike the common law, American corporation law recognizes, as does the law of California, the continuance of a corporation for the purpose of litigating its actions after dissolution, despite its apparent legal death. See, United States v. Safeway Stores, 10 Cir., 1944, 140 F. 2d 834, 836-837; Defense Supplies Corporation v. Lawrence Warehouse Co., 1949, 336 U.S. 631, 634-635, 69 S.Ct. 762, 93 L.Ed. 931.
In determining the availability of the carry-back to a particular corporation existing in a particular year, the courts are pragmatic. They apply the same criterion applied generally in recognizing for tax purposes a corporate entity, whatever motive entered into its creation, when it is actual and has a distinct tax identity. Higgins v. Smith, 1940, 308 U.S. 473, 476-477, 60 S.Ct. 355, 84 L.Ed. 406; Moline Properties, Inc., v. C. I. R., 1943, 319 U.S. 436, 438-439, 63 S.Ct. 1132, 87 L.Ed. 1499; National Carbide Corp. v. C. I. R., 1949, 336 U.S. 422, 69 S.Ct. 726, 93 L.Ed. 779; United States v. Cummins Distilleries Corp., 6 Cir., 1948, 166 F.2d 17, 20-21; Delaney v. Gardner, 1 Cir., 1953, 204 F.2d 855, 861. And where a corporation is actually in the process of liquidation, the determination of whether it is, for tax purposes, non-existent, although the legal requirements of liquidation under State law may not have been completed, depends upon the fact whether, during the particular business year, in addition to the affairs incidental to formal winding up, it engaged in any "unambiguous business venture[s]". Moline Properties, Inc., v. C. I. R., supra, 319 U.S. at page 440, 63 S.Ct. 1134. This test for determining whether, for tax purposes, a corporation is engaged in business activity has been applied by this and other courts under other provisions of the Internal Revenue Code. See, Willis v. C. I. R., 9 Cir., 1932, 58 F.2d 121, 123; Thrash Lease Trust v. C. I. R., 9 Cir., 1938, 99 F.2d 925, 928; Title Insurance & Trust Co. v. C. I. R., 9 Cir., 1938, 100 F.2d 482; Porter v. C. I. R., 9 Cir., 1942, 130 F.2d 276, 280. And see, Main-Hammond Land Trust v. C. I. R., 6 Cir., 1952, 200 F.2d 308, 312. This court, in one of the cases just cited, in determining what constituted doing business, laid down the following simple rule which accords with the standard referred to by the Supreme Court in Moline Properties, Inc., v. C. I. R., supra:
"What constitutes the doing of business? Flint v. Stone Tracy Co., 220 U.S. [107] at page 171, 31 S. Ct. 342, 55 L.Ed. 389, Ann.Cas.1912 B, 1312. They went beyond transactions carried on for the single purpose of effecting a liquidation of assets; and for that reason the collection of an income tax was authorized under the terms of the revenue act." Willis v. Commissioner of Internal Revenue, 9 Cir., 1932, 58 F.2d 121, 123. (Emphasis added.) In that case, the taxpayer contended that a certain trust was merely a liquidating trust, the income from which was not taxable. The court adverted to the fact that the trust agreement gave the trustees the power to acquire, manage, improve and dispose of trust property and other properties to be acquired. Under it, in the taxable years, income was derived from collection of rents, from sale of certain parcels of real property and acquisition of others by exchange, and from building buildings. These efforts, especially the exchange of property and the erection of a new building in order to increase the income, were considered sufficient to show that, while the major part of the income of the trust was derived from rents and liquidation of two mortgages, the other activities conformed to "a business venture" pattern.
"* * * an income tax deduction is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer." Interstate Transit Lines v. C. I. R., 1942, 319 U.S. 590, 593, 63 S.Ct. 1279, 1281, 87 L.Ed. 1607.1
In the case before us, the taxpayer carried on a brewery business, &#x2014; manufacture and sale of beer. All its physical assets, including the manufacturing plant, were transferred prior to April 1, 1944, to a partnership which, thereafter, carried on the business of the corporation.3
All the operating properties and the offices of the corporation were turned over to the partnership, &#x2014; the corporation for a short time retaining its office in the company building and storing its records on its premises. The only activities testified to by the officers of the corporation were those in conjunction with the preparation of claims for refunds alleged to be due. Under California law, such activities could have been carried on even after dissolution. Calif.Corp.Code, § 5400. And dissolution would not have affected any actual cases pending before any court or administrative agency relating to the property of the corporation. Calif.Corp. Code, § 5401.
It may be conceded that carry-backs will not be denied to a corporation in the process of liquidation, if total liquidation is delayed for a reasonable length of time for the benefit of the corporation, and business activities continue to be carried on, even though to a lesser degree. Bowman v. Glenn, D.C. Ky.1949, 84 F.Supp. 200, affirmed sub nom. Glenn v. A. H. Bowman & Co., 6 Cir., 1950, 184 F.2d 670; Eastern Grain Elevator Corp. v. McGowan, D.C.N.Y. 1950, 95 F.Supp. 40; Aluminum Products Co. v. U. S., 1951, 101 F.Supp. 373, 121 Ct.Cl. 187. These cases recognize the principle promulgated in the regulations (Reg. 111, Sec. 29. 22(a)-20) that corporate existence may be continued for the purpose of "liquidating the assets and paying the debts", whether it be done under receivership, trusteeship or under direct statutory machinery. Here, the Commissioner allowed, and the Tax Court approved a finding that treated the corporation as a living entity to the end of 1944. There is no justification in law or in ethics for continuing such generous treatment during the years 1945 and 1946 in order to allow carry-back of hypothetical profits during a two-year period during which no real corporate business was carried on. The few matters that the officers attended to &#x2014; so insignificant that they were not compensated during the period by the corporation, &#x2014; could have been carried on after the filing of the dissolution certificate terminating the de jure existence of the corporation. The taxpayer, for reasons of its own, having chosen not to do so, should not be given the benefit of a carry-back available to live, active business organizations. That benefit is intended for corporations either actively engaged in business or engaged in active liquidation of their assets and payment of their debts while nonoperating. Here the taxpayer was a mere shell. It was not operating or liquidating. At most, it was receiving what, in the light of its assets before liquidation, was "petty cash" and asserting claims for tax refunds against federal and state agencies, which it could have done legally after completing dissolution.4
1. The soundness of this principle has been questioned: Note, 1943, 56 Harv.L.Rev. 1142. However, we must follow it, as the Supreme Court has shown no inclination to depart from it. To the contrary, in an opinion filed on May 23, 1955, United States v. Olympic Radio & Television, Inc., 349 U.S. 232, 75 S.Ct. 733, 736, the Court reasserted the principle in this manner:
"We deal here with a deduction which one obtains not as of right, but as of grace. Deputy v. Du Pont, 308 U.S. 488, 493, 60 S.Ct. 363, 366, 84 L.Ed. 416. The taxpayer has the burden to show that it is within the provision allowing the deduction." (Emphasis added.)
2. Here again the courts have a realistic approach. Thus, where, subsequent to expressed intention to liquidate or substantial disposition of assets, business activities are, nevertheless, carried on, the corporation will be treated as an existing entity for tax purposes. Whitney Mfg. Co. v. C. I. R., 1950, 14 T.C. 1217, 1220-1221; Roeser & Pendleton, Inc., v. C. I. R., 1950, 15 T.C. 966, 975-976; Union Bus Terminal, Inc., v. C. I. R., 1949, 12 T.C. 197, 199-200, affirmed sub nom.: Commissioner of Internal Revenue v. Union Bus Terminal, 5 Cir., 1950, 179 F. 2d 399. Compare, United States v. Lynch, 9 Cir., 1951, 192 F.2d 718, 721; Gensinger v. C. I. R., 9 Cir., 1953, 208 F.2d 578, 579, in which this court, under dissimilar tax situations involving transfer or distribution of assets of corporations, determined taxability according to the actualities involved. In the Gensinger case this court held that a corporation remained an entity despite dissolution because the filing of a notice of dissolution and the appointment of a "trustee in dissolution" did not, under Washington law, Rem.Rev.Stat. § 3802-48 et seq., effect a dissolution and was not "intended to effect a present distribution of all corporate assets". At page 579. (Emphasis added.)
3. On the basis of this fact, the Supreme Court of California, in an action for personal injuries instituted against the corporation, held that the partnership became the alter ego of the corporation. Gordon v. Aztec Brewing Co., 1949, 33 Cal.2d 514, 521, 203 P.2d 522.
4. "On the other hand, as to the year 1944, it appears from the balance sheet at the end of 1943, that the liquidation had by the year's end progressed to the point where there was no longer any valid reason for delaying dissolution, and the corporation, though not dissolved de jure, must be regarded for the purpose of its claim to excess profits carry back for 1944, as de facto dissolved. For it must be remembered that it is not necessary in Texas to delay dissolution until there has been a complete winding up. Its tax statutes provide for the continuance of corporate existence for three years after dissolution for the purpose of enabling those charged with the duty to settle up its affairs." Wier Long Leaf Lumber Co. v. C. I. R., 5 Cir., 1949, 173 F.2d 549, 553. (Emphasis added.)
5. California Corporations Code, § 4605, formerly Calif. Civil Code, 1935 ed., § 400a (2).
6. Wier Long Leaf Lumber Co. v. C. I. R., supra, Note 4, loc. cit.