Court Opinion

ID: 4496754
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:15:03.295802+00
Date Added: 2024-06-11T15:04:03.994004
License: Public Domain

*855OPINION.
Sternhagen :
The principal question is whether, in the fiscal years ended September 30,1932,1933, and 1934, the petitioner was “formed or availed of for the purpose of preventing the imposition of the surtax upon its stockholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed” and thus subject to the 50 percent tax provided in section 104, Revenue Act of 1932. The Commissioner determined that it was, and the taxpayer in contesting the determination has undertaken to prove that it was not.
In its brief, petitioner says (p. 26):
It may be admitted that the petitioner is a holding or investment company and that the prima facie presumption raised by section 104 (b)1 applies. *856This admission is supported by Blaffer’s testimony that he had petitioner do nothing but invest in and sell stocks, that it was a trading company, and that the only way he expected it to make money was through trading. Consideration of the issue must therefore start with the postulate that the corporation was formed or availed of for the condemned purpose, and must continue with the inquiry whether the evidence proves affirmatively that it was not. Drastic as the tax may be, the statute clearly expresses the legislative intent to apply it to a mere holding or investment corporation unless the corporation succeeds in establishing its purpose to be wholly other than that of preventing surtax upon its shareholders — not only that there was another purpose, but that there was a complete absence of the disapproved purpose. Obviously a holding or investment corporation may be formed or availed of for several purposes, but it can not escape this tax unless it proves that it had no purpose to enable the escape of surtax. It is to this complete lack of the condemned purpose that its evidence must be directed, and if it does not fairly prove an absence of such purpose it must fail, regardless of what other purposes it may prove. This is, in our opinion, the effect of subdivision (b), and the evidence must be examined in its entirety to determine whether it disproves the statutory presumption and the Commissioner’s determination.
The organization and existence of the corporation and the transfer to it by the Blaffers of dividend paying stocks had the effect of relieving them of the surtaxes which would have been attributable to such dividends had they continued to come to the Blaffers as owners of the stocks. The statute, however, does not operate merely because of such actual effect; it operates if such effect was the purpose. Cecil B. deMille, 31 B. T. A. 1161, 1174; affd., 90 Fed. (2d) 12; certiorari denied, 302 U. S. 713; C. H. Spitzner & Son, Inc., 37 B. T. A. 511. In the absence of the condemned purpose, the effect alone is no foundation for the tax. This is not to say that the effect is of no significance, for it may, and perhaps often does, indicate the probability of a purpose to induce it. In ordinary life it is not unreasonable to infer that the effect of a voluntary act is among the purposes of the actor. So long as the inference be not arbitrary and evidence to the contrary be entertained and fairly weighed, it may be regarded as reasonable. And in determining the purpose, the actor’s categorical statement may be of less weight than the facts and circumstances which affect it. To be skeptical of the weight to be accorded an interested witness’ statement in view of other evidence is not the same as wholly to reject the statement as if it were dishonest.
The petitioner was wholly owned by Blaffer and his wife. It was organized when they were actively trading in the stock market and *857after they had accumulated a fortune of over thirteen million dollars, represented by securities of many corporations in many states. It is said that the reasons for its formation grew out of the survey made by Barton and Block in 1927. It was to facilitate the administration of Blaffer’s estate at death, because the transfer of various securities was a cumbersome process. Yet only a small portion of the securities was transferred to the corporation, and those retained were still various and spread over six states. Such a purpose is not inconsistent with a further purpose to effect a saving in surtaxes. Barton and Block advised that such a corporation must make distributions to avoid this very tax. Thus Blaffer was fully advised of the use to which such a corporation could be put, and he frankly admits that he knew that a failure of the corporation to distribute would invite the tax.
But he says that in the tax years he could not properly permit the corporation to distribute because it was insolvent. This is the principal point upon which petitioner’s argument is based. The insolvency is predicated not on petitioner’s books, for they showed a steadily increasing earned surplus; they showed gross receipts each year in excess of outlay and a resulting annual net, and an annually expanding net worth. The insolvency is predicated on the comparison each year after the market collapse of the market value of its assets, consisting wholly of' securities, and the amount of its liabilities, consisting wholly of its brokerage accounts guaranteed by himself. This argument of insolvency would circumvent the clear intendment of the statute. The Board has already held that when considering a holding or investment company the diminution in market value of its securities may not be offset against income derived through gains and profits, interest, and dividends, so as to establish that the corporation was not availed of to save the shareholders from surtax. Rands, Inc., 34 B. T. A. 1094 (on review C. C. A., 6th Cir.); Nipoch Corporation, 36 B. T. A. 662 (on review C. C. A., 2d Cir.). As to a business corporation actually engaged in commercial operations, the effect of market values upon its surplus has been recognized as more substantial and the argument more engaging, C. H. Spitzner & Son, Inc., supra. In the present case the point has little force when the alleged insolvency is analyzed with regard for its substance. Blaffer and his wife were the sole shareholders. The brokers were the sole creditors (except for $7,000 owed to Blaffer in 1932 and 1933), and these creditors held the securities and Blaffer’s personal guaranty. No one else was to the slightest extent interested in the affairs of the corporation. Insolvency was a mathematical abstraction, for the creditors were fully secured by Blaffer’s individual guaranty and Blaffer had ample assets to assure *858it. Even article 1347 of the Texas Civil Statutes,2'which petitioner cites, would go no farther than to make the directors jointly and severally liable for the corporation’s debts, to the extent of the dividend ; and such liability Blaffer had already assumed by his guaranty. To say, under these circumstances, that the large trading profits, dividends, and interest are not indicative of the purpose which underlies the tax is to give mere words and doctrine a force greater than the truth which lies behind them. Ordinarily, for purposes of im come tax, the rise and fall in value of retained assets is not a factor for consideration,3 and if the market value of petitioner’s securities had risen, the rise would not have had significance either in measuring its income or discovering the applicability of section 104. In Blaffer’s own hands the dividends, interest, and gains from trading would have been taxable, irrespective of the fall in the market value of securities he did not sell, and hence the purpose to enable him to escape surtax is not disproved by evidence of market value of securities held by his corporate instrument. Rands, Inc., supra; Nipoch Corporation, supra; A. D. Saenger, Inc., 33 B. T. A. 135; and R. & L. Inc., 33 B. T. A. 857, are illustrations of the extent to which the argument would operate to frustrate the statutory intent. It may not be forgotten that by section 104 (d) it was open to the shareholders to treat their distributive shares of the corporation’s income as constructively received by them and within their taxable income even though it was deemed wiser for any reason that there should be no actual distribution.
The petitioner argues that since the Blaffers transferred to it only a comparatively small portion of their securities, it may not be believed that their purpose or that of the corporation was to save surtax, for the retention of the larger portion is inconsistent with such a purpose. There is no explanation to be found in the evidence for the retention. It does not, however, overcome the prima facie purpose attaching to the corporation within the sphere and to the extent of its operations. The statute operates upon the corporation and the tax is measured by its income. The fact that the creators and shareholders limited its operations and withheld a majority of *859their assets still leaves the inquiry open as to the application of the statute to the corporation such as it was.
Neither the desire of Blaffer to provide an occupation for his minor son then in college nor to facilitate the administration of his estate after death is inconsistent with a purpose to escape surtaxes, Rands, Inc., supra.
It is said that the condemned purpose is disproved by the evidence that the Blaffers not only transferred stocks yielding taxable dividends, but also rid themselves of liabilities carrying deductible interest, the relinquished deductions being greater than the gross income of the dividends. For example, it appears that for the fiscal year 1930, the interest paid by the corporation was $109,856.59, while the dividends received amounted to $64,332.32, having the effect, it is said, of depriving the shareholders of a substantial factor of tax reduction. This comparison is regarded as a demonstration that there was no purpose to effect a saving of surtaxes. Again the argument falls short of the mark. The failure of the corporation to distribute to its shareholders is not considered solely with regard for the income which it may derive through corporate dividends, but with regard for its gains and profits from all sources. The corporation had trading profits of $100,227.85, which was $51,241.76 greater than its trading losses, and each year the profits exceeded the losses. This performance was the very expectation of Blaffer when he formed the corporation and transferred both the securities and the interest bearing liabilities. He said that he expected it to make money through trading. The purpose to renounce an advantageous interest deduction thus loses force, especially since in each year the net result to the corporation was a taxable net income the distribution of which would have imposed surtax upon its shareholders.
The arguments of petitioner to overcome the prima facie effect of the Commissioner’s determination have been considered separately and found inadequate. But it should not be thought that the decision is based alone on a piecemeal examination of the logical effect of each circumstance disclosed by the evidence. Dealing with a holding or investment corporation, the inquiry is a broad one of substance ; that is, whether all the evidence taken together leads reasonably to the conclusion that the corporation was not within the description of the statute. Congress has said that holding and investment corporations are vulnerable. The considerations applicable to them are not like those applicable to a manufacturing or merchandising corporation. Arguments which might be moving as to the latter, because of the nature and exigencies of its business, will have no substance when made by a holding or investment company of a single individual.
*860The 50 percent tax was properly applied.
In determining the deficiency, the Commissioner excluded from petitioner’s gross income gains from sales to Blaffer of $19,687.81 in 193S and $16,075 in 1934, which petitioner had included in its returns.' This exclusion by the Commissioner was because he thought it consistent with a contemporaneous disallowance by him of deductions taken by Blaffer for losses in sales by him to the corporation. In separate proceedings the Board has held such losses deductible since recognition of the transactions may not be denied. There is no dispute about the facts. The amounts should be restored to petitioner’s income.
Reviewed by the Board.

Judgment will be entered under Rule 50.

 SEC. 104. ACCUMULATION OS' SURPLUS TO EVADE SURTAXES.
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(b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.

 If the directors of any corporation shall knowingly declare and pay any dividend when the corporation is insolvent, or any dividend the payment of which would render it insolvent, they shall be jointly and severally liable for all the debts of the corporation then existing, and for all debts of the corporation which thereafter, during the time such directors respectively remain in office, shall be contracted. The amount for which they shall be so liable shall not exceed the amount of such dividend. If any director is absent at the time of declaring the dividend, or shall object thereto at the time such dividend is declared, and shall file his objections in writing with the secretary or other officer of the corporation having charge of the books, he shall be exempt from said liability.

 Law of Federal Income Tax, Paul and Mertens, vol. 1, § 5.10, p. 112; cf. § 26.54, vol. 3, p. 290.