Court Opinion

ID: 9446812
Source: CourtListenerOpinion
Date Created: 2023-08-03 22:18:48.377629+00
Date Added: 2024-06-11T17:30:47.361889
License: Public Domain

HAND, Circuit Judge
(concurring).
Subdivision (a) of § 533 of the Code of 1954, like its predecessor, § 102 (c), declares that “the fact that the earnings- and profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the income tax with respect to shareholders, unless the corporation by the preponderance of the evidence shall prove to the contrary.” In the case at bar the difficulty, as I view it, is in determining what were the “reasonable needs” of the corporation in the year ending April 30, 1950. If we are to judge these by what happened afterwards they included the retention of all the assets then possessed ¡by the corporation. Without Casey’s added personal loan of $50,000 it is clear that the corporation’s experimentation could not have continued, so that Casey at least did not think that the existing accumulation was not reasonably needed for the enterprise in which he and Owen were involved. I believe that the statute meant to set up as a test of “reasonable needs,” only the corporation’s honest belief that the existing accumulation was no greater than was reasonably necessary. Section 532(a) was a penal statute, designed to defeat any plan to evade the shareholders’ taxes, and there can be no doubt that it presupposes some deliberate purpose to do so and is not satisfied by proving that the corporation was mistaken in its estimate of its future “needs.”
In the case at bar the embarrassment is in deciding what were those “needs,” and for that one must look to the estimate of those in control of the corporation, because, being an artificial person, it could obviously have no independent estimate. The trouble here is that during the year in question there were only two shareholders, and they were at odds. Casey thought that the corporate “needs” included not only keeping unimpaired the existing assets, but even adding to them, as he did by $50,000 of his own money. Owen was willing to allow the corporation to invest $50,000 in a new machine, but he refused to consent to anything more. Hence, so far as I can see, the Commissioner did not prove what were the “needs” of the corporation and that was a condition upon his finding that the retained assets exceeded them. The situation is not likely to occur again, for it is seldom, if ever, that those in charge of a corporation — usually the board of directors — -is evenly divided, but I see no escape here from reversing the order of the Tax Court unless, as I have said, by setting up a standard of what are “reasonable needs” that is independent of the opinion of those in control. For that reason I concur in reversing the order.
LUMBARD, Circuit Judge, concurs in the opinion of MADDEN, Judge, and in this opinion as well.