Source: http://www.law.cornell.edu/supremecourt/text/393/297
Timestamp: 2014-10-26 09:00:33
Document Index: 123317185

Matched Legal Cases: ['§ 531', '§ 531', '§ 532', '§ 269', '§ 355', '§ 532', '§ 102', '§ 532', '§ 220', '§ 102', '§ 14', '§ 102', '§ 532', '§ 533', '§ 532', '§ 541', '§ 551', '§ 1', '§ 1', '§ 8']

UNITED STATES, Petitioner, v. The DONRUSS COMPANY. | LII / Legal Information Institute
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393 U.S. 297 (89 S.Ct. 501, 21 L.Ed.2d 495)
UNITED STATES, Petitioner, v. The DONRUSS COMPANY.
Argued: Oct. 22, 23, 1968.
[HTML] conc_diss, HARLAN, DOUGLAS, STEWART
[HTML] See 393 U.S. 1112, 89 S.Ct. 848.
This case involves the application of §§ 531537 of the Internal Revenue Code of 1954, which impose a surtax on corporations 'formed or availed of for the purpose of avoiding the income tax with respect to * * * (their) shareholders * * * by permitting earnings and profits to accumulate instead of being divided or distributed.'
The Court of Appeals reversed and remanded for a new trial, holding that 'the jury might well have been led to believe that tax avoidance must be the sole purpose behind an accumulation in order to impose the accumulated earnings tax.' Donruss Co. v. United States, 384 F.2d 292, 298 (C.A.6th Cir. 1967). The Court of Appeals rejected the Government's proposed instruction and held that the tax applied only if tax avoidance was the 'dominant, controlling, or impelling motive' for the accumulation. Ibid. We granted the Government's petition for certiorari to resolve a conflict among the circuits
over the degree of 'purpose' necessary for the application of the accumulated earnings tax, and because of the importance of that question in the administration of the tax. 390 U.S. 1023, 88 S.Ct. 1406, 20 L.Ed.2d 280 (1968).
The accumulated earnings tax is established by §§ 531537 of the Internal Revenue Code of 1954. Section 531 imposes the tax.
'The accumulated earnings tax imposed by section 531 shall apply to every corporation * * * formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.'
Both parties argue that the language of the statute supports their conclusion. Respondent argues that Congress could have used the article 'a' in §§ 532 and 533 if it had intended to adopt the Government's test. Instead, argues respondent, Congress used the article 'the' in the operative part of the statute, thus indicating that tax avoidance must at least be the dominant motive for the accumulation.
The Government argues that respondent's construction gives an unduly narrow effect to the word 'the.' Instead, contends the Government, this Court should focus on the entire phrase 'availed of for the purpose.' Any language of limitation should logically modify 'availed of' rather than 'purpose' and no such language is present. The Government further argues that Congress has dealt with similar problems in other sections of the Code and has used terms such as 'principal purpose,' §§ 269(a), 357(b)(1), and 'used principally,' § 355(a)(1)(B). Similar terms could have been used in §§ 532(a) and 533(a), but were not. Finally, the Government points to the fact that prior to adoption of § 102 of the Revenue Act of 1938, (
52 Stat. 483) the forerunner of § 532(a) used the words 'the purpose,' while the evidentiary section used the words 'a purpose,' thus indicating that tax avoidance need only be one purpose. Respondent replies that the change from 'a' to 'the' in the evidentiary section supports its conclusion. Respondent also contends that the statute before the change was consistent with its construction.
We find both parties' arguments inconclusive. The phrase 'availed of for the purpose' is inherently vague, and there is no indication in the legislative history that Congress intended to attach any particular significance to the use of the article 'the.' Nor do we find the change in the evidentiary section from 'a' to 'the' at all helpful. That change came as part of a significant revision in the operation of the section, and there is no indication that it was other than a mere change in phraseology.
Indeed, the Report of the Senate Finance Committee accompanying the bill that was to become the Revenue Act of 1938, insofar as it sheds any light on the question, supports the view of the Government. 'The proposal is to strengthen (the evidentiary) section by requiring the taxpayer by a clear preponderance of the evidence to prove the absence of any purpose to avoid surtaxes upon shareholders. * * *.' S.Rep.No. 1567, 75th Cong., 3d Sess., 5 (1938) (emphasis added). Since the language of the statute does not provide an answer to the question before us,
we have examined in detail the relevant legislative history. That history leads us to conclude that the test proposed by the Government is consistent with the intent of Congress and is necessary to effectuate the purpose of the accumulated earnings tax.
In its first years of operation, difficulties in proving a fraudulent purpose made the tax largely ineffective. To meet this problem, Congress deleted the work 'fraudulently.' Revenue Act of 1918, § 220, 40 Stat. 1072; see S.Rep. No. 617, 65th Cong., 3d Sess., 5 (1918).
During the next few years, numerous complaints were made about the ineffectiveness of the accumulated earnings tax. Various attempts were made to strengthen the tax during the 1920's and 1930's, but the statute remained essentially the same until 1934. See Joint Committee on the Economic Report, The Taxation of Corporate Surplus Accumulations, 82d Cong., 2d Sess., 200205 (Comm. Print 1952). In 1934, Congress dealt with one of the more flagrant examples of that ineffectiveness, the personal holding company. Personal holding companies were exempted from the general accumulated earnings tax and were subjected to a tax on undistributed income, regardless of the purpose of that accumulation. Revenue Act of 1934, §§ 102, 351, 48 Stat. 702, 751. The reason for the change was that, '(b)y making partial distribution of profits and by showing some need for the accumulation of the remaining profits, the taxpayer makes it difficult to prove a purpose to avoid taxes.' H.R.Rep.No. 704, 73d Cong., 2d Sess., 11 (1934).
Again in 1936, Congress attempted to solve the continuing problem of undistributed corporate earnings. 'The difficulty of proving such (tax avoidance) purpose * * * has rendered * * * (the accumulated earnings tax) more or less ineffective.' H.R.Rep. No. 2475, 74th Cong., 2d Sess., 5 (1936). However, Congress did not change the requirement that 'purpose' must be proved. Rather, it attempted the alternative method of imposing an undistributed profits surtax on most corporations. Revenue Act of 1936, § 14, 49 Stat. 1655. The tax on personal holding companies and the general accumulated earnings tax were retained.
The problem continued to be acute and several proposals were made by and to Congress in 1938. The House Ways and Means Committee proposed a surtax on all closely held operating companies. Only minor changes were proposed by the Committee in the accumulated earnings tax. See H.R.Rep. No. 1860, 75th Cong., 3d Sess. (1938). The House rejected all but the changes in the accumulated earnings tax. The Senate approached the problem of retained corporate earnings in a different way. Labeling the House Co mittee's recommendation a 'drastic' remedy, the Senate Finance Committee recommended 'dealing with this problem where it should be dealt withnamely, in section 102, relating to corporations improperly accumulating surplus. The proposal is to strengthen this section by requiring the taxpayer by a clear preponderance of the evidence to prove the absence of any purpose to avoid surtaxes upon shareholders after it has been determined that the earnings and profits have been unreasonably accumulated.' S.Rep. No. 1567, 75th Cong., 3d Sess., 5 (1938). The change was thought to make it clear that the burden of proving intent, rather than the lesser burden of producing evidence on the question, was to be on the taxpayer. Id., at 16. The Senate proposal was enacted. Revenue Act of 1938, § 102, 52 Stat. 483. The Committee felt that a 'reasonable enforcement of this revised section will reduce tax avoidance * * *.' S.Rep. No. 1567, supra, at 5.
Only insignificant changes were made in the accumulated earnings tax from 1938 to 1954. Discussion of the problem continued, however, and numerous proposals were made to alter the tax. See, e.g., Joint Committee on the Economic Report, The Taxation of Corporate Surplus Accumulations, 82d Cong., 2d Sess., (Comm. Print 1952). Congress took cognizance of these complaints and incorporated many of them in the Internal Revenue Code of 1954, but no change was made in the required degree of tax avoidance purpose.
Rather, the changes, which were generally favorable to the taxpayer,
demonstrated congressional disaffection with the effect of the tax and its emphasis on intent. Congress' reaction to the complaints was to emphasize the reasonable needs of the business as a proper purpose for corporate accumulations
and to make it easier for the taxpayer to prove those needs.
As the House Ways and Means Committee said, 'Your committee believes it is necessary to retain the penalty tax on unreasonable accumulations as a safeguard against tax avoidance. However, several amendments have been adopted to minimize the threat to corporations accumulating funds for legitimate business purposes * * *.' H.R.Rep. No. 1337, 83d Cong., 2d Sess., 52 (1954), U.S. Code Cong. & Admin.News 1954, p. 4078.
The cases cited by respondent do not convince us to the contrary. For the most part, they lack detailed analysis of the precise problem. Perhaps the leading case for respondent's position is Young Motor Co. v. Commissioner of Internal Revenue, 281 F.2d 488 (C.A.1st Cir. 1960). That case relied in part upon the use of the article 'the' instead of 'a.' We have previously rejected that argument. The case also relied as did the court below, on certain cases from the gift and estate tax areas.
We find those cases inapposite. They deal with areas of the Code whose language, purpose, and legislative history are entirely different from those of the accumulated earnings tax. See Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 284, 80 S.Ct. 1190, 1196, 4 L.Ed.2d 1218 (1960).
I reach this conclusion on what I regard as common-sense grounds. In practice, the accumulated-earnings provisions are applied only to closely held corporations controlled by relatively few shareholders.
As the Court admits, the shareholders almost always will have been advised that accumulation of corporate earnings will result in individual tax savings. That fact will be before the jury. In accord with the Court's decision, the jury will be instructed that 'it is sufficient if (avoidance of shareholders' tax) is one of the purposes for the company's accumulation policy.' (Emphasis supplied.)
Under these circumstances, the jury is very likely to believe that it must find the forbidden purpose and impose the tax whenever the Government shows that the taxpayer has accumulated earnings with knowledge of the resultant tax saving, irrespective of any contrary evidence put forward by the taxpayer. The approved instruction simply tells the jury that the taxpayer must have had a 'purpose' to avoid individual taxes. In everyday speech, we commonly say that a person has a 'purpose' to do something when he acts with knowledge that the thing will inevitably result. Even were the jury legally knowledgeable, it might reach the same conclusion, for, assuming that the word 'purpose' as used in § 532 is synonymous with 'intention,'
there is ample authority for the proposition that an actor will be deemed to have an 'intention' to cause consequences of an act if 'the actor * * * believes that the consequences are substantially certain to result from (the act.).'
To confront the taxpayer with this likelihood that its evidence of another purpose will be entirely disregarded is inconsistent with the provision of § 533(a) which explicitly affords the taxpayer an opportunity to avoid the tax by showing 'by the preponderance of the evidence' that it had a 'contrary' purpose.
The court below adopted the view of the First Circuit. See Young Motor Co. v. Commissioner of Internal Revenue, 281 F.2d 488, 491 (1960); see also Apollo Industries, Inc. v. Commissioner of Internal Revenue, 358 F.2d 867, 875876 (1966). The Second Circuit has rejected 'the view that the prevention of the imposition of surtaxes must have been shown to have been the dominant factor behind the ac umulations.' Trico Products Corp. v. Commissioner of Internal Revenue, 137 F.2d 424, 426, cert. denied, 320 U.S. 799, 64 S.Ct. 369, 88 L.Ed. 482 (1943). See also United States v. Duke Laboratories, Inc., 337 F.2d 280 (1964). The Fifth Circuit has also rejected the position that tax avoidance must be the 'primary or dominant' purpose of the accumulation. Barrow Mfg. Co. v. Commissioner of Internal Revenue, 294 F.2d 79, 82 (1961), cert. denied, 369 U.S. 817, 82 S.Ct. 827, 7 L.Ed.2d 783 (1962). The Eighth and Tenth Circuits have taken what appears to be an intermediate position, holding that imposition of the tax is proper if tax avoidance is one of the 'determinating purposes.' Kerr-Cochran, Inc. v. Commissioner of Internal Revenue, 253 F.2d 121, 123 (C.A.8th Cir. 1958); World Pub. Co. v. United States, 169 F.2d 186, 189 (C.A.10th Cir. 1948), cert. denied, 335 U.S. 911, 69 S.Ct. 480, 93 L.Ed. 443 (1949). The Sixth Circuit has adhered to its view in Shaw-Walker Co. v. Commissioner of Internal Revenue, 390 F.2d 205 (1968). A petition for certiorari in that case is now pending in this Court.
Section 532(b) exempts personal holding companies, foreign personal holding companies, and certain tax-exempt corporations. Internal Revenue Code of 1954, § 532(b). Both types of holding companies are taxed under other provisions of the Code. See Internal Revenue Code of 1954, §§ 541547 (personal holding companies); Internal Revenue Code of 1954, §§ 551558 (foreign personal holding companies).
The Regulations shed no light on the problem. See Treas.Reg. §§ 1.5311.537, 26 CFR §§ 1.5311.537.
Another major change was made in the Revenue Act of 1921, 42 Stat. 227. Section 220 of that Act shifted the incidence of the accumulated earnings tax from the shareholders to the corporation itself. 42 Stat. 247. The change was prompted by the decision in Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521 (1920). See H.R.Rep. No. 350, 67th Cong., 1st Sess., 1213 (1921).
See S.Rep. No. 1622, 83d Cong., 2d Sess., 69 (1954); B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders 213214 (2d ed. 1966).
Restatement (Second), Torts § 8A (1965). See also id., Comment b; R. Perkins, Criminal Law 657658 (1957); Cook, Act, Intention, and Motive in the Criminal Law, 26 Yale L.J. 645 (1917).