Court Opinion

ID: 9643778
Source: CourtListenerOpinion
Date Created: 2023-08-22 20:40:31.750304+00
Date Added: 2024-06-11T18:11:03.729771
License: Public Domain

SANBORN, Circuit Judge
(dissenting).
N. C. Beim contracted to purchase stock in the W. H. Barber Company on the installment plan. If the stock was to be acquired, the installments had to be paid when due. Under the contract of purchase the purchaser, if not in default, was entitled to dividends upon the stock which was subject to the contract. Beim formed a family holding company, which took over the contract, became entitled to receive the dividends, and was obligated to pay the installments. This had the effect of reducing the surtax which Beim would otherwise have had to pay. The company applied upon the installments which fell due under the contract during the years 1932 and 1933 the dividends received from the Barber Company, and no profits and no funds available for dividends accumulated in those years. It is contended, however, that the company was “formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed”, *902and was subject to a fifty per cent tax on income under Section 104 of . the Revenue Act of 1932.
That the company was formed for the purpose of preventing the imposition of the surtax upon its shareholders was a permissible finding of fact and is binding on this Court; but I am unable to convince myself that there is evidence that the imposition of the surtax was to be prevented, or was prevented, through the medium of the accumulation by the company of distributable profits. The corporation was organized to do exactly what it did do: receive the dividends on the stock of the Barber Company being purchased; apply those dividends upon the installments provided for in the contract as they fell due; and, after all installments had been paid, distribute gains and profits to shareholders. Article 541, Treasury Regulations 77, promulgated under the Revenue Act of 1932, states: “Section 104 is designed to discourage the formation or use of a corporation for the purpose of preventing the imposition of surtaxes upon its shareholders, through the device of permitting its gains and profits to accumulate instead of being distributed.” Section 104 was directed at corporations which were designed or used to prevent, through the accumulation of distributable profits, the imposition of surtaxes upon their shareholders, and not at corporations designed or used to prevent, in some other way, the imposition of such surtaxes. The Beim Company was formed to prevent the imposition of surtaxes, but not in the particular way which would make it liable to the fifty per cent penalty tax. See and compare Corporate Investment Company v. Commissioner, 40 B.T.A. 1155. I can see that every time that the company paid an installment upon the contract for the purchase of the stock, its financial condition was improved and the value of its shares enhanced, but I am unable to see how that gave it accumulated earnings available for dividends. Any debtor’s position is improved by the payment of his debts, but this improvement, although it may be attributable to income, would hardly be considered an accumulation of profits. The income of the Beim Company and its obligation to pay installments arose out of the same contract. If the income was its income for purposes of taxation, by the same token the obligation to make payments under the contract was its obligation and was to be taken into consideration in determining its liability for taxes. No shareholder during the years 1932 and 1933 could have compelled the company to make any distribution of dividends. If it had made a distribution to shareholders of its income in those years, it would have had to borrow money or sell stock or assets to- meet its obligations. The taxing authorities did not treat this corporation as a sham, a fraud or a mere pretense. It was treated as a bona fide corporation for tax purposes, but liable for the tax imposed by Section 104. In Helvering v. Johnson, 8 Cir., 104 F.2d 140, at page 143, this Court pointed out that a taxpayer has the legal right to decrease the amount of what would be his taxes or avoid them by means which the law permits; and that a corporation for purposes of taxation is an entity distinct from its shareholders.
Since I think that the evidence failed to disclose that the Beim Company was taxable under the particular statute relied upon, I am unable to concur.