Court Opinion

ID: 9691060
Source: CourtListenerOpinion
Date Created: 2023-08-24 20:06:28.642729+00
Date Added: 2024-06-11T18:19:09.802028
License: Public Domain

GREEN, Judge.
I concur in all that is contained in the foregoing opinion, but the importance of the case may justify or at least excuse some further observations.
A writer in the National Income Tax Magazine for April, 1927, estimated a loss to the government of $168,000,000 during the years 1922 to 1925 through corporations that Were used to accumulate a surplus and prevent the application of the surtaxes. How much altogether has been lost from income taxes due the government through this method óf evasion is difficult to estimate, but it must be very many times this amount. The fact, however, that the provision of the statute1 now under discussion was a part of our tax laws has undoubtedly served as a deterrent to many that might have been otherwise disposed to use this method of evasion. On the other hand, if the contention made on the part of the plaintiff should be sustained, the plan used by the plaintiff affords an easy method of avoiding the surtax rates in the higher brackets. The situation in this respect would be such that the surtax would only be paid in the high brackets by those who did not wish to avoid their moral obligations to the government while those who saw fit to use a holding company for the purpose of evading taxation would be rewarded by being made exempt. Such a situation, it appears to me, would be not only extremely unjust and inequitable but intolerable as a method of taxation and the government in prosperous years would lose enormously in revenues. I think it clear that the Constitution in giving the authority to levy a tax on incomes does not so restrict the government as to make such a tax a failure. When the amendment authorizing the imposition of a tax on incomes became a part of the Constitution,2 by clear implication and under all rules of constitutional law the government was authorized not only to “lay and collect taxes on incomes” but to enact such further statutory provisions as would enable the government to exercise the power so conferred. The majority opinion shows by quotation from Flint v. Stone Tracy Company, 220 U. S. 107, 31 S. Ct. 342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312, that the system of taxation being within the power of Congress, it is for that body to determine what means are appropriate and adapted to the purposes of making the law effectual.
The argument that the statute in question is unconstitutional appears to be based principally upon the provision that certain facts are made “prima facie .evidence of a purpose to escape the surtax.” Counsel appear to misread or at least put a most singular interpretation upon this provision. They treat it as if it were the same in effect as though the presumption waa a conclusive one which the plaintiff was not permitted to refute or rebut by evidence, and this, as I view it, entirely destroys the effect of their argument.
It seems not to have been noticed that the provision above quoted and the paragraph containing it might have been left out of the statute without making any real change in its effect except possibly in its enforcement. It is 'entirely unnecessary, for the Commissioner might, if he saw fit, without this provision in the statute use the facts stated therein- as the basis of making an assessment against the plaintiff or any other matter which came into his mind and which appeared to him to be sufficient for making an assessment against the plaintiff on the ground that its purpose was to escape the surtax. But such an assess*237ment either with or without the provision in controversy would not conclude the plaintiff. It had the right to present either before the Commissioner or in any court to which it saw fit to appeal, any evidence that it could furnish to show that in fact there was no purpose to evade the surtax, and thereby overcome the presumption created by the statute. The ease would then stand for a finding of faet upon what evidence was before the court bearing upon the question of whether there was an intent or purpose to evade the surtax. As it may be claimed that plaintiff did introduce some testimony on this question, it should be noted here that evidence and testimony are often very different things. Testimony is what a litigant presents to the court; evidence is the court’s conclusion from this testimony. In this particular case this court, entirely disregarding the presumption, has found from all of the evidence that plaintiff’s purpose was to evade the surtax.
To me it seems somewhat singular that the claim should be set up that there is a want of due process .of law in such a procedure or that the statute is arbitrary and capricious in its effect. On the contrary, this presumption simply places the burden upon plaintiff, just where it is in all tax eases, to show that the tax is wrongfully assessed. This principle is not arbitrary but a very fair and proper one. No one so well knows or can ascertain all of the facts which pertain in any way to the question of whether the tax is properly assessed as the taxpayer, and it is particularly so in this case where the question of purpose is concerned. It is true that mere testimony of the party most concerned that he had no purpose or intent to evade the tax might not weigh very heavily with the court for the reason that the circumstances of the ease might, as we haye found, directly show .the contrary. But everything that could possibly exist in the circumstances in .favor of the plaintiff, it was at liberty to present to the court. In other words in the case at bar plaintiff not only had every opportunity but every advantage in presenting its case to the court, and I cannot understand how a statute that concedes so much to a litigant can properly be held not to grant “due process of law.” The cases cited by counsel not only have no application but to my mind are not at all analogous to the one now before the court. Schlesinger v. Wisconsin, 270 U. S. 230, 46 S. Ct. 260, 70 L. Ed. 557, 43 A. L. R. 1224, created an absolute presumption of fact which those who succeeded to the decedent were not permitted to rebut. There were also other matters in that case which distinguish it from the case at bar but it is not necessary, as I think, to call attention to them because the basic principle of the Wisconsin statute is so utterly different from the one which we are now considering that it is not necessary to go further.
The case of Heiner v. Donnan, 285 U. S. 312, 52 S. Ct. 358, 361, 76 L. Ed. 772, instead of being in favor of the contention of counsel for plaintiff is against it. It needs but a casual reading of the ease last cited to show that the basic principle laid down in the majority opinion is “that a statute which imposes a tax upon an assumption of faet which the taxpayer is forbidden to controvert is so arbitrary and unreasonable that it cannot stand under the Fourteenth Amendment.” It is only fair to conclude that when the statute affords to the taxpayer every opportunity to controvert the facts upon which the tax must be based, there is no constitutional objection on the ground that it does not afford due process of law.
Counsel for plaintiff, as it appears to me, carry fhis error in construing and interpret^ ing the statute to an extreme when they contend that the standard by which the tax is fixed is contained in the provision of subdivision (b) of section 220 which has already been quoted. On the contrary, there is but one standard by which the tax is fixed which is contained in subdivision (a) of the same section. In order to justify the imposition of the tax the statute requires that it must appear that a corporation “is 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.” The provisions of subdivision (b) making the faet that the corporation is a mere holding or investment company or that the gains or profits are permitted to accumulate beyond the reasonable needs of business prima facie evidence are used simply for the purposes stated in the preceding paragraphs; that is, for the purpose of having the tax assessed, or, as is said in the majority opinion, for the purpose of making “the taxpayer show his hand.” The real test of the tax is contained in subdivision (a) and in order to apply the tax the court must find, as this court has, that there was a purpose .of preventing the imposition of the surtax in the manner provided by subdivision (a).
While I consider the argument on behalf of plaintiff entirely misapplied, it ought perhaps to be said in this connection that there *238is no difficulty in determining what a mere holding or investment company is, and the courts are every day called upon to determine as a question of fact whether a certain course of conduct is reasonable or not. This occurs not only in eases of negligence where a defendant may be mulcted in heavy damages because he has shown a want of such care “as a reasonably prudent man would use under like circumstances,” but he may be even liable criminally for gross negligence and this notwithstanding the fact that it might be difficult to find two persons who were exactly agreed upon what was reasonable and what was not, or what was reckless and wanton under certain circumstances and what was not. These matters as well as the question of purpose which arises under subdivision (a) are not questions which may be defined with exactness or which present problems which may be solved by a mathematical computation. Nevertheless the courts, as we have stated above, are every day making findings of fact in relation thereto which determine these matters and basing judgments upon the findings thus made.
Another objection made to the statute is that the tax prescribed is not based upon the rate which would have been paid by the stockholders if the corporation had not been formed nor has it any relation thereto. If this fact, is sufficient to make the statute unconstitutional, then the general corporation tax is also unconstitutional because it has not the slightest relation to the tax which the stockholders might pay if the corporation had not been formed. In the ease of many large corporations there are often a very considerable number of stockholders who pay no income tax whatever. Under the statute in question the tax is based upon the purpose of the stockholders as carried out through the corporation. In other words, a corporation makes itself the instrument of the stockholders in effectuating the illegal purpose and therefore becomes equally responsible. In any event, Congress has the undoubted right to classify‘corporations and impose a tax upon the class-so obtained regardless of the tax which would be paid by the stockholders. Thus corporations have been classified according to the profits which they made and an additional and very heavy tax imposed accordingly by what was known as the excess-profits tax, now repealed. A class has even been fixed by the number of different establishments operated by a corporation and a graded tax imposed accordingly. Surely Congress may classify the corporations which are used for a legitimate purpose and those which are formed or availed of for an illegitimate purpose and may, if it sees fit, impose a tax on those which are constructed and used for the purpose of preventing the government from obtaining the revenues to which it is entitled. Nor does the statute require that the business should be conducted in any particular way. It is not the manner in which the business is conducted which causes'the. imposition of the tax but the purpose for which the corporation is formed or for which it is used. No matter how the business is conducted, unless this purpose is shown, the tax cannot be imposed.
It is also contended that what has herein been termed a tax is in fact a penalty and therefore unconstitutional. Assuming for the purposes of the argument only that it is a penalty, it would appear to be immaterial in the case now under consideration for the reason that Congress has power to impose a penalty for evading taxes or assisting or furthering the evasion thereof. Penalties are imposed for a violation of a statute or regulation. In the Child Labor Case, 259 U. S. 20, 42 S. Ct. 449, 66 L. Ed. 817, 21 A. L. R. 1432, so much relied upon by counsel for plaintiff, it is said that where the sovereign enacting the law has the power to impose both tax and penalty the difference between revenue production and mere regulation may be immaterial. But it appears to me the contention of counsel for plaintiff that the tax under consideration is in fact merely a penalty has no valid support in the record. The argument is based largely on the fact that the words “penal” and “penalized” have been used in congressional reports with reference to the tax in question. Counsel overlook the fact that in speaking colloquially the words “penal” and “penalized” are often applied to cases where a payment is required or action taken which will cause a loss. Thus we find from the dictionary that a race horse which is made subject to a handicap is said to be penalized, and following the common method of expression a manufacturer of colored oleomargarine might be said to be penalized when he was required to pay a tax of ten times as much as he would if no coloring matter had been used. It has already been shown that the tax is not upon the method of doing business but upon acts done with a certain' purpose, and even if it should appear that the economic effect would be such .that no person would find it profitable to act in such a way as to cause the imposition of the tax this does not transform the tax into a penalty. If this were the rule, obviously the oleomargarine tax could not be sustained as it was by the Supreme Court. *239So also in the case of Couthoui v. United States, 54 F.(2d) 158, 162, 73 Ct. Cl. 363 (certiorari denied 285 U. S. 548, 52 S. Ct. 396, 76 L. Ed. 939), it appeared that the effect of the tax was practically to prohibit sales of tickets by ticket brokers upon a certain margin of profits but the tax was nevertheless held to be a valid one.
It should also be noted that the statement on the part of counsel that no appreciable amount of revenue has been raised or could be expected to be raised by the tax is a mistake. The Treasury records show that many millions of dollars have been collected under it; and if the tax is sustained, many millions more will be collected. Nor does the fact, if it be a fact, that Congress may have had some other purpose in imposing the tax in addition to that of collecting revenue render the tax invalid. This is shown in the opinion in the Couthoui Case, supra, in which we said:
“It is a common but, as we think, erroneous opinion in some quarters that the legislative body enacting a taxing statute, cannot with propriety take into consideration any other matters but the revenue sought to be obtained, and that if it has other purposes besides raising revenue in imposing the tax, or in prescribing a particular manner in which it shall be levied, the tax is invalid.”
Like the statute in the oleomargarine cases, the aet before the court is “on its face” an aet for levying taxes. It may serve the very useful purpose of preventing the government from being deprived of revenue which it should justly receive,' and it may he that Congress had this purpose in mind in addition to the purpose of raising revenue, but this would not make the aet invalid. As was shown in the decision in the Couthoui Case, supra, Congress in passing a taxing aet may well take into account considerations as to whether the aet will be beneficial in other respects as well as useful in raising needed revenue. The principle that should control the determination of this question is well stated as follows in McCray v. United States, 195 U. S. 27, 64, 24 S. Ct. 769, 780, 49 L. Ed. 78, 1 Ann. Cas. 561.
It is only “where it was plain to the judicial mind that the power had been called into play, not for revenue, but solely for the purpose of destroying rights which could not be rightfully destroyed consistently with the principles of freedom and justice upon which the Constitution rests, that- it would be the duty of the courts to say that such an arbitrary act was not merely an abuse .of a delegated power, but was the exercise of an authority not conferred.”
It seems almost unnecessary to add that the plaintiff had no constitutional right to use its corporate powers for the purpose of defeating taxation and that the tax in question deprived neither the corporation nor its stockholders of any right.
There is another feature of the ease which should be considered. It is well settled that where a corporation is-formed simply for the purpose of being the agent or instrumentality of another corporation or some individual the courts will look through the forms to the realities of the case “as if the corporate agency did not exist and will deal with them as the justice of the ease may require.” See United States v. Reading Co., 253 U. S. 26, 62, 40 S. Ct. 425, 434, 64 L. Ed. 760. In the case of Acme Operating Co. v. United States, 74 Ct. Cl. 82, this court held that a certain corporation was merely certain individuals masquerading under its name.3 So in the ease now before the court, the plaintiff corporation is merely a mask behind which the sole beneficial stockholder, L. W. Nieman, seeks to hide from income taxes. The corporation at every turn must necessarily aet in accordance with the direction of Nieman while under his control and in every way is subject to the same rules of law.
What has been said above also answers other objections and if the basis thereof is correct the provisions of the statute under consideration are neither arbitrary nor oppressive but just and proper.
The contention that the statute under consideration imposes a tax upon income from bonds in violation of the terms of the contract of the government with the bondholder is also based on a mistaken construction of its provisions. Section 220, by its express terms, imposes the tax only on such income as “would be subject to tax in whole or in part in the hands of an individual owner.” As shown in the majority opinion, the income from the bonds involved in the ease was subject to surtaxes, and a surtax is merely an additional or extra tax; that is something above or in addition to the normal tax. It is so defined in the dictionary and the law books. See 33 C. J., p. 301, § 71. Congress has changed it from time to time and can make it very low or very high as it sees fit. At present, in the upper brackets of the individual income tax, the surtax is much higher than the rate imposed by section 220. The statute *240makes the tax subject to the rule that applies to individual incomes, and I think it clear that no constitutional question can arise on this point. On the contrary, it is merely a question of whether the tax has been computed correctly. It is plain from a reading of the statute that the amount of the tax and the income upon which it is levied depend upon other provisions of the income tax laws, the validity of which never has been in doubt. So far as this point is concerned, the question is not a constitutional one but merely a matter of the correct computation of the taxes. If the Commissioner has erroneously applied these taxes, his error would have nothing to do with the validity of section 220; but as the plaintiff does not contend there was any .error in this respect, it can be safely assumed there was none.
For the reasons stated in the majority opinion and those stated above, I concur in the judgment dismissing the plaintiff’s petition.

 Section 220 of the Revenue Acts of 1924 and 1926. This section is continued under another number in subsequent acts.

 Article XVI.

 This case was reversed on another point but certiorari was denied on this matter.