Document: 393 U.S. 297 89 S.Ct. 501 21 L.Ed.2d 495 UNITED STATES, Petitioner,v.The DONRUSS COMPANY. No. 17. Argued Oct. 22, 23, 1968. Decided Jan. 13, 1969. Rehearing Denied Feb. 24, See 1112, 848. Mitchell Rogovin, Washington, D.C., for petitioner. Richard L. Braunstein, respondent. Mr. Justice MARSHALL delivered the opinion of Court. 1 This case involves application §§ 531—537 Internal Revenue Code 1954, which impose a surtax on corporations 'formed or availed purpose avoiding income tax with respect to * (their) shareholders by permitting earnings and profits accumulate instead being divided distributed.' 2 Respondent is corporation engaged in manufacture sale bubble gum candy operation farm. Since all respondent's outstanding stock has been owned Don B. Wiener. In each years from 1955 1961, respondent operated profitably, increasing its undistributed $1,021,288.58 $1,679,315.37. The company did not make loans Wiener provide him benefits other than salary, nor it investments unrelated business, but no dividends were declared during entire period. 3 gave several reasons accumulation policy; among them capital inventory requirements, costs, risks inherent particular business general economy. also expressed desire expand more specific invest major distributor, Tom Huston Peanut Company. There definite plans question, 1964 purchased 10,000 shares at cost $380,000. 4 Commissioner assessed accumulated taxes against 1960 1961. paid brought this refund suit. At conclusion trial, Government specifically requested that jury be instructed that: 5 '(I)t necessary avoidance shareholder's sole unreasonable earnings; sufficient if one purposes company's policy.' 6 instruction was refused court terms statute had 'the purpose' accumulations. jury, response interrogatories, found beyond reasonable needs retained Judgment entered appealed. 7 Court Appeals reversed remanded new holding might well have led believe must behind an order tax.' Donruss Co. v. United States, 384 F.2d 292, 298 (C.A.6th Cir. 1967). rejected Government's proposed held applied only 'dominant, controlling, impelling motive' accumulation. Ibid. We granted petition certiorari resolve conflict circuits1 over degree 'purpose' tax, because importance question administration tax. 390 1023, 88 1406, 20 280 (1968). I. 8 established 1954. Section 531 imposes tax.2 532 defines shall apply. That section provides: 9 'The imposed apply every formed any corporation, distributed.'3 533(a) provides 10 'For 532, fact are permitted determinative avoid shareholders, unless preponderance evidence prove contrary.' 11 cases before Tax Court, § 534 allows taxpayer certain instances shift burden proving business. 535 'accumulated taxable income.' It credit portion minimum lifetime $100,000. Finally, 537 'reasonable business' include 'reasonably anticipated' needs. 12 dispute us narrow one. contends rebut presumption contained 533(a), establish 'one purposes' argues may demonstrating impelling' reason Neither party questions trial court's instructions issue whether does challenge jury's finding indeed unreasonable. intimate about standards governing reasonableness corporate 13 concl de examination language, purpose, legislative history construction correct Accordingly, we reverse judgment below remand shareholder II. 14 Both parties argue language supports their conclusion. Congress could used article 'a' 533 intended adopt test. Instead, respondent, 'the' operative part statute, thus indicating least dominant motive accumulation.4 gives unduly effect word 'the.' Government, should focus phrase 'availed purpose.' Any limitation logically modify of' rather such present. further dealt similar problems sections as 'principal purpose,' 269(a), 357(b)(1), 'used principally,' 355(a)(1)(B). Similar 532(a) not. points prior adoption 102 Act 1938, (52 Stat. 483) forerunner words while evidentiary 'a need purpose. replies change consistent construction. 15 find both parties' arguments inconclusive. inherently vague, there indication attach significance use Nor do helpful. came significant revision section, mere phraseology.5 Indeed, Report Senate Finance Committee accompanying bill become insofar sheds light view Government. proposal strengthen (the evidentiary) requiring clear absence surtaxes upon shareholders. *.' S.Rep.No. 1567, 75th Cong., 3d Sess., (1938) (emphasis added). answer us,6 examined detail relevant history. leads conclude test intent effectuate III. 16 congressional attempt deter entity personal taxes. 'is compel distribute needed conduct o so that, when distributed, individual stockholders will liable' received, Helvering Chicago Stock Yards Co., 318 693, 699, 63 843, 846, 87 L.Ed. 1086 (1943). originated Tariff 1913, 38 114, first following ratification Sixteenth Amendment. fraudulently preventing imposition through medium gains distributed II(A)(2), 166. same provided 'shall prima facie fraudulent escape 167. 17 operation, difficulties made largely ineffective. To meet problem, deleted work 'fraudulently.' 1918, 220, 40 1072; see S.Rep. 617, 65th (1918).7 18 During next few years, numerous complaints ineffectiveness Various attempts 1920's 1930's, remained essentially until 1934. Joint Economic Report, Taxation Corporate Surplus Accumulations, 82d 2d 200—205 (Comm. Print 1952). 1934, flagrant examples ineffectiveness, company. Personal companies exempted subjected income, regardless 102, 351, 48 702, 751. '(b)y making partial distribution showing some remaining profits, makes difficult taxes.' H.R.Rep.No. 704, 73d (1934). 19 Again 1936, attempted solve continuing problem earnings. difficulty (tax avoidance) rendered tax) less ineffective.' H.R.Rep. 2475, 74th (1936). However, requirement proved. Rather, alternative method imposing most corporations. 14, 49 1655. retained.8 continued acute proposals 1938. House Ways Means closely operating companies. Only minor changes 1860, Sess. (1938). approached different way. Labeling Co mittee's recommendation 'drastic' remedy, recommended 'dealing where with—namely, relating improperly accumulating surplus. after determined unreasonably accumulated.' thought intent, lesser producing taxpayer. Id., 16. enacted. 52 483. felt enforcement revised reduce supra, 5. insignificant 1938 Discussion continued, however, alter See, e.g., took cognizance these incorporated many required purpose.9 changes, generally favorable taxpayer,10 demonstrated disaffection emphasis intent. Congress' reaction emphasize proper accumulations11 easier those needs.12 As said, 'Your committee believes retain penalty accumulations safeguard avoidance. amendments adopted minimize threat funds legitimate 1337, 83d (1954), Cong. & Admin.News p. 4078. 22 brief summary indicates, demonstrates concern form corporation's Numerous methods employed prevent practice, proved unsatisfactory way another. Two conclusions can drawn efforts. First, recognized tremendous ascertaining Second, saw often purposes. appears facts factor incidence accumulation, subject onest difference opinion, much objective inquiry, susceptible effective scrutiny, vagaries motive. 23 would requires dominant, impelling, controlling. seems exacerbate trying avoid. Rarely motive, even decisions. factors contribute action ultimately decided upon. Respondent's allow taxpayers equal doubt determination accuracy, certainly depend almost exclusively interested testimony management. go long toward destroying created very problem. Judge Learned Hand said weaker 1921, 42 247, '(a) stands footing participants' state mind support presumption, practically unenforceable without Business Corp. Revenue, 62 754, 755 (C.A.2d 1933). And, '(t)he utility (that) nigh destroyed (it) saddled proof primary accumulation.' Barrow Mfg. 294 79, 82 (C.A.5th 1961), cert. denied, 369 817, 827, 783 (1962). 24 cited convince contrary. For part, they lack detailed analysis precise Perhaps leading position Young Motor 281 488 (C.A.1st 1960). relied 'a.' previously argument. below, gift estate areas.13 inapposite. They deal areas whose entirely Duberstein, 363 278, 284, 80 1190, 1196, 1218 (1960). 25 cannot subscribe suggestion our totally irrelevant. still serves isolate motives decision accumulate. Obviously futile. addition, means knowledge, undoubtedly present nearly case. open show though knowledge consequences present, 26 Reversed remanded. 27 HARLAN, whom DOUGLAS STEWART join, concurring dissenting part. 28 I agree erred framing way, harmony statutory scheme chosen. 29 1954 states part: 30 ts *, 31 32 Our task decide what definition comports best revealed underlying 33 am accord Court's opinion. too successive wording read together history, help inquiry. reveals progressive intention rely heavily comparatively criterion: excess Nevertheless, apparent materials chose give 'last chance' despite unreasonableness standards, due proscribed My approved effectively deny clearly meant afford substitute fuzzy chance indeed. 34 reach regard common-sense grounds. accumulated-earnings provisions controlled relatively shareholders.1 admits, always advised result savings. jury. decision, 'it (avoidance shareholders' (Emphasis supplied.) 35 Under circumstances, likely forbidden whenever shows resultant saving, irrespective contrary put forward simply tells everyday speech, commonly say person something he acts thing inevitably result. Even legally knowledgeable, conclusion, for, assuming synonymous 'intention,'2 ample authority proposition actor deemed 'intention' cause act substantially act.).'3 confront likelihood another disregarded inconsistent provision explicitly affords opportunity 'by evidence' 'contrary' 36 conceding know expected saving 'in case,' ante, 309, '(i)t earnings.' If, exegesis instruction, then engaging wishful thinking. If explication included told finds 'contribute(d) Such inform consequence actually minds once shown extraordinarily play however slight, decision. Again, me scope therefore loaded 37 Sixth Circuit decided, argues, improper. apparently require stronger perhaps together. negate improper 533(a). my view, nonimposition liability, think accumulating, possibility saving. These considerations suggest rule: 'but cause' language. succeed show, aid spur giving fulfilling penalize permit other, irrational, possible, affording provide. easy understand reasons, consider preferable standard First Circuit. 488, 491 (1960); Apollo Industries, Inc. 358 867, 875—876 (1966). Second prevention ac umulations.' Trico Products 137 424, 426, 320 799, 64 369, 482 States Duke Laboratories, Inc., 337 (1964). Fifth 'primary dominant' (1961), Eighth Tenth Circuits taken intermediate position, 'determinating purposes.' Kerr-Cochran, 253 121, 123 (C.A.8th 1958); World Pub. 169 186, 189 (C.A.10th 1948), 335 911, 69 480, 93 443 (1949). adhered Shaw-Walker 205 A now pending rates 1/2% (defined 535) $100,000, plus 531. 532(b) exempts companies, foreign tax-exempt 532(b). types taxed under Code. 541—547 (personal companies); 551—558 (foreign companies). (1960), based dominant-purpose' No providing investment 102(b), 483 Regulations shed Treas.Reg. 1.531—1.537, CFR 1.531—1.537. Another 227. 220 shifted itself. 247. prompted Eisner Macomber, 252 189, 521 (1920). 350, 67th 1st 12—13 (1921). evasion 1937. 1546, (1937). addressed itself aspect establishing separate taxation again 1937, 201, 50 818. urged Hearings Pertaining General Revision Code, pt. 3, 2142 (1953). decrease revenues $10,000,000 fiscal year 1955. 1622, 72 U.S.Code 4629. 535(c) allowed anticipated addition omitted existence 'clear evidence,' substituted 'preponderance' Allen Trust Georgia, 326 630, 66 389, 90 367 (1946); City Bank Farmers McGowan, 323 594, 65 496, (1945); Wells, 283 51 446, 75 867 (1931). (1954); Bittker J. Eustice, Federal Income Corporations Shareholders 213—214 (2d ed. 1966). 'Purpose' listed synonym Black's Law Dictionary, 948 (4th 1968). Many courts two interchangeably construing Henry Van Hummell, Commissioner, 364 746 (10 1966); Youngs Rubber Corp 331 (2 1964); Smoot Sand Gravel 241 197 (4 1957); Harry A. Koch Vinal, 228 F.Supp. 782 (D.C.1964); Fuel Carriers, 202 497 (D.C.1962), vacated grounds, 322 576 (5 1963). Restatement (Second), Torts 8A (1965). id., Comment b; R. Perkins, Criminal 657—658 (1957); Cook, Act, Intention, Motive Law, Yale L.J. 645 (1917).

Category: 11