Court Opinion

ID: 4496236
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:14:45.132981+00
Date Added: 2024-06-11T15:04:03.484542
License: Public Domain

*165OPINION.
Smith :
The first question presented by this proceeding is whether the petitioner is liable to tax under section 104 of the Revenue Act of 1928 upon its profits for the fiscal year ended January 31, 1931. That section, so far as material to this proceeding, is as follows:
(a) If any corporation, however created or organized, 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, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section 13 and shall be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax.
(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.
*166In his deficiency notice the respondent stated:
After careful consideration of your protest dated July 19, 1932 and subsequent information furnished this office, the Bureau approves the revenue agent’s conclusion that in accordance with the provisions of section 104 of the Revenue Act of 1928 your company has permitted its gains and profits to accumulate beyond the reasonable needs of the business instead of being distributed, which is construed as prima facie evidence of a purpose to prevent imposition of surtax upon its stockholders.
Does the evidence overcome this prima facie presumption? And, if so, was the petitioner “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”, during the taxable year?
The petitioner was organized for the purpose of operating a chain of grocery stores. For a number of years after its organization the profits of the business were used in extending the chain. At some time prior to 1922 the petitioner began to invest a portion of its surplus profits in the purchase of bonds and stocks. Its balance sheet at January 31, 1922, shows its investment in bonds and stocks at $490,000 and $130,710, respectively. Its holdings of securities in subsequent years greatly increased. There was also, up to 1929, a very large increase in the market value of the securities acquired. Since 1929 the petitioner has not greatly expanded its grocery business. Its profits have been large but they have not been paid over to its sole stockholder in the form of dividends. Most of them have been invested in securities.
Petitioner’s balance sheet at the beginning of the taxable year shows cash on hand of $1,332,332.28; notes receivable (Henry Kohl), $470,000; accounts receivable, $26,816.37; bonds, mortgages, and stocks, $2,838,718.07; and other current assets against actual liabilities (exclusive of reserves) of $1,180,879.07. At the end of the taxable year petitioner’s balance sheet shows cash, $1,405,961.04; notes receivable (Henry Kohl), $610,000; bonds, mortgages, and stocks, $3,048,452.74; and other current assets against the actual liabilities (exclusive of reserves) of only $276,552.19. Its actual surplus at January 31, 1931, was $7,938,965.54.
Th,e petitioner contends that this large surplus was of benefit to it in obtaining credit at banks and in enabling it to purchase merchandise at a low price. It appears, however, that the petitioner’s credit had been excellent for many years prior to the taxable year and that it did not obtain loans from banks at a lower rate of interest simply because it had a large investment in bonds and stocks. Manifestly, the amounts invested in bonds and stocks were not used by the petitioner either in the taxable year or for several *167years prior or subsequent thereto in its grocery business. We find as a fact that the petitioner’s accumulation of earnings was far in excess of the “reasonable needs” of the corporate business.
We are also of the opinion that the evidence of record does not rebut the prima facie presumption created by the statute that the accumulation of earnings beyond the “reasonable needs of the business” was for the purpose of preventing the imposition of the surtax upon its sole stockholder. The evidence shows that Henry Kohl, personally, needed some of the profits of the business. Prior to the taxable year he had borrowed from the petitioner $470,000, and, during the taxable year, he borrowed an additional amount of $140,000. No interest was ever charged or paid upon these loans. If the amount borrowed during the taxable year had been distributed as a dividend the petitioner would have been subject to a large surtax upon it. By reason of the failure to pay the $140,000 as a dividend the petitioner escaped surtax upon that amount of income. See William C. De Mille Productions, Inc., 30 B. T. A. 826.
Upon the evidence before us we have made the finding that the petitioner was “availed of” during the fiscal year ended January 31, 1931, for the purpose of preventing the imposition of the surtax upon its sole stockholder “through the medium of permitting its gains and profits to accumulate instead of being divided or distributed.” Cf. United Business Corporation of America, 33 B. T. A. 83; R. & L., Inc., 38 B. T. A. 857.
The petitioner contends that: “Section 104 of the Revenue Act of 1928, as construed and applied by the Commissioner of Internal Revenue, or his deputy, to the income of petitioner for the fiscal year ending January 31, 1931, violates rights secured to the petitioner under the Constitution of the United States.” It has not, however, advanced any argument in support of this proposition in its brief, and the constitutionality of the provision is sustained upon the authority of United Business Corporation of America v. Commissioner (C. C. A., 2d Cir.), 62 Fed. (2d) 754; certiorari denied, 290 U. S. 635; United States v. Tway Coal Sales Co. (C. C. A., 6th Cir.), 75 Fed. (2d) 336; Williams Investment Co. v. United States, 3 Fed. Supp. 225; 77 Ct. Cls. 396.
Reviewed by the Board.

Judgment will be entered for the respondent.