Opinion
No. 44001.
October 5, 1942.
H.B. McCawley, of Washington, D.C. (Warren W. Grimes, of Washington, D.C., on the brief), for plaintiff.
Daniel F. Hickey, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Action by the Atlantic Refining Company against the United States to recover capital stock tax paid by plaintiff for the year ending June 30, 1935.
Petition dismissed.
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following:
Special Findings of Fact.
1. Plaintiff is a Pennsylvania corporation, with its principal office in Philadelphia. It was engaged in refining and marketing petroleum products and prior to September 1927 had owned directly various subsidiary corporations engaged in the production and transportation of crude petroleum. September 26, 1927, plaintiff organized, under the laws of the State of Maine, the Atlantic Company (hereinafter sometimes referred to as the "Maine Company"), and caused to be transferred to it all the stock of various subsidiary corporations in exchange for all the stock of the Maine Company. This action was taken in order to have eliminated from its (plaintiff's) Pennsylvania capital stock tax return the value of capital stock held by plaintiff in these subsidiary corporations whose assets were without the State of Pennsylvania.
2. After the formation of the Maine Company, it was the policy of plaintiff to make transfers of earnings received by that company from its subsidiaries to plaintiff from time to time as plaintiff required the use of those funds. When these transfers were made it was the practice of plaintiff to give the Maine Company a promissory note for the amount of each transfer. During the period from 1927 to 1931 various sums were transferred between the companies in that manner and at the end of 1931 whatever amounts had been transferred were adjusted between the two companies. While the policy of making transfers from time to time as desired was continued after 1931, in 1932 plaintiff adopted the practice of issuing notes every six months to the Maine Company on account of transfers made during a six months' period. As a result of this latter policy notes were given by plaintiff to the Maine Company during 1932, 1933, and 1934 on account of transfers of funds from the Maine Company to plaintiff, as follows:
June 30, 1932 ...................... $2,270,000 December 31, 1932 .................. 1,225,000 __________ Total for 1932 .................. 3,495,000 June 30, 1933 ...................... 3,290,000 December 31, 1933 .................. 2,915,000 __________ Total for 1933 .................. 6,205,000 June 30, 1934 ...................... 2,000,000
In addition, by December 24, 1934, further advances had been made by the Maine Company to plaintiff in the amount of $2,892,230 for which a note had not yet been issued.
The note of June 30, 1932, which differed from the other notes only in the amount involved, read as follows:
"On demand, we promise to pay to the order of Atlantic Company (Maine) the sum of Two Million, Two Hundred Seventy Thousand Dollars for value received."
No interest was ever paid by plaintiff to the Maine Company on any of these notes. The notes were carried as notes receivable on the Maine Company's books and as notes payable on plaintiff's books.
3. December 24, 1934, the Maine Company adopted a resolution declaring a dividend of $14,592,230 which was made up of the amounts of $3,495,000, $6,205,000, and $2,000,000 for which the demand notes were given in 1932, 1933, and 1934, respectively, and an additional $2,892,230 withdrawn by plaintiff from the Maine Company during the latter half of 1934, but for which no note had been made. The resolution read as follows:
"RESOLVED, That a dividend of $415.00 a share be declared on the outstanding 35,162 shares of stock of this Company, totalling $14,592,230, payable on December 31, 1934, to stockholders of record at the close of business December 24th, 1934."
Upon the declaration of the dividend, the following journal entry was made on the books of the Maine Company:
Dividends Paid ......... $14,592,230.00 Notes Receivable — The Atlantic Refining Co. ......................................... $11,700,000.00 Advances — The Atlantic Refining Co. 2,892,230.00
Dividend #1 of $415.00 per share on 35,162 shares or $14,592,230.00 was declared on 12/24/34 payable 12/31/34 per attached copy of resolution by the Board of Directors. The Atlantic Refining Company holding the entire amount of outstanding stock of the Atlantic Company, received credit for this amount by our cancelling Advances Receivable from them of $2,892,230, and our cancelling the following Notes Receivable due by Atlantic Refining Co.Dated Amount
6/30/32 $2,270,000.00 12/31/32 1,225,000.00 6/30/33 3,290,000.00 12/31/33 2,915,000.00 6/30/34 2,000,000.00 _____________ 11,700,000.00
Consistent entries were likewise made on the books of the plaintiff. This was the first dividend ever declared by the Maine Company.
4. At all times when funds were transferred to plaintiff, as shown in the preceding findings, the Maine Company had an earned surplus in excess of the amounts transferred, such surplus being profits realized subsequent to February 28, 1913.
5. In filing its income tax returns for the years 1932 and 1933, plaintiff did not include therein as dividends received in those years the amounts of $3,495,000 and $6,205,000 referred to above as having been transferred by the Maine Company to plaintiff in those respective years. In its income tax return for 1934 plaintiff showed the entire amount of $14,592,230 as dividends received by it in 1934 and plaintiff deducted these dividends in computing its taxable net income for that year.
6. September 28, 1935, pursuant to an extension of time allowed, plaintiff filed its capital stock tax return for the year ending June 30, 1935, showing an adjusted declared value of its entire capital stock for the income-tax taxable year ended December 31, 1934, of $79,904,486.02 and a capital stock tax due of $79,904 which it paid October 1, 1935. In fixing the adjusted declared value, plaintiff first set out the original declared value as established by the return for the taxable year ended June 30, 1934, of $80,000,000, that is, the declared value of its capital stock as of December 31, 1933, the end of the preceding income-tax taxable year. It then made adjustments by way of additions and deductions on account of transactions during the income-tax taxable year 1934. Among the additions made to the original declared value was the amount of $4,892,230 referred to in finding 3 as having been transferred by the Maine Company to plaintiff during the calendar year 1934, but no adjustment was made on account of the two amounts of $3,495,000 and $6,205,000 which made up the remainder of the dividend declared by the Maine Company December 24, 1934, and referred to in finding 3.
7. Thereafter the Commissioner examined the plaintiff's capital stock tax return referred to in the preceding finding and increased the adjusted declared value by the amounts of $3,495,000 and $6,205,000 on the ground that those two amounts represented dividends received by plaintiff in 1934 which were deducted by plaintiff in computing its taxable net income for that year. As a result of that determination, the Commissioner assessed an additional capital stock tax for the fiscal year ended June 30, 1935, of $9,700, which, with interest of $1,061.55, plaintiff paid May 10, 1937.
8. September 21, 1937, plaintiff filed a claim for refund of the capital stock tax of $10,761.55 which was paid as shown in the preceding finding and assigned as grounds therefor that the Commissioner had improperly included in the adjusted declared value of its capital stock for the fiscal year ended June 30, 1935, $3,495,000 and $6,205,000 ($9,700,000) as dividends received by plaintiff from the Maine Company, whereas plaintiff received those dividends from its wholly owned subsidiary, the Maine Company, in the years 1932 and 1933, respectively.
9. January 4, 1938, the Commissioner notified plaintiff of the rejection of its claim for refund, his letter reading in part as follows:
"Since the evidence discloses the Atlantic Refining Company gave notes to the Atlantic Company (Maine) in exchange for the amounts advanced during the years 1932 and 1933, it would appear that the Atlantic Refining Company was indebted to the Atlantic Company until the declaration of the dividend in the amount of $14,592,230.00, which dividend was paid by the cancellation of the notes and accounts payable. In view of the foregoing, and as no dividends were declared during 1932 and 1933 by the Atlantic Company, it is held that the amount of $9,700,000.00 should be included in the addition under item (5), Schedule I, and that the additional assessment of tax and interest was properly made."
10. The parties have stipulated (Joint Exhibit A, made a part hereof by reference) that in the event judgment should be entered in favor of plaintiff on account of the additional assessment referred to above, the amount claimed in plaintiff's petition should be reduced by $807, plus interest thereon at 6 percent per annum from July 31, 1935, on account of the refund of that amount of 1935 capital stock tax to the Maine Company, of which plaintiff was the sole stockholder and the sole transferee in liquidation.
This is a suit for the recovery of capital stock tax paid by plaintiff for the year ending June 30, 1935. The only issue involved is whether plaintiff's adjusted declared value of its capital stock shall be increased by the entire amount of a dividend declared by plaintiff's wholly owned subsidiary corporation on December 24, 1934.
Plaintiff is a Pennsylvania corporation which has been engaged in the refining and marketing of petroleum products for many years. In 1927 it owned the stock of various subsidiary corporations which were engaged in the production and transportation of crude petroleum. In that year, in order to facilitate the preparation of its Pennsylvania State capital stock tax return and bring about a situation more favorable to itself in the amount of tax which it would be required to pay under such return, it caused to be organized the Atlantic Company under the laws of Maine and transferred to the Maine Company all the stock of these subsidiary corporations in exchange for the stock of the Maine Company. During the period from 1927 to 1931 various sums were transferred between plaintiff and the Maine Company as the needs or desires of the two companies required, but by the end of 1931 whatever amounts had been transferred were adjusted between the two companies.
From the beginning of 1932, amounts continued to be transferred from the Maine Company to plaintiff and at the end of each six months plaintiff would give to the Maine Company its demand promissory note for whatever amounts had been transferred during the six months' period. Pursuant to that arrangement plaintiff gave to the Maine Company two promissory notes in 1932 (one on June 30, 1932, in the amount of $2,270,000, and another on December 31, 1932, for $1,225,000), and two similar notes in 1933 (one on June 30, 1933, in the amount of $3,290,000, and another on December 31, 1933, for $2,915,000). Further transfers were made by the Maine Company to plaintiff during 1934 with the result that in December 1934 there was owing by the plaintiff to the Maine Company the sum of $14,592,230, and on December 24, 1934, the Maine Company adopted a resolution declaring a dividend in the total amount of the indebtedness. With the adoption of that resolution, the notes which had been given were canceled and marked paid as of December 31, 1934. In its income-tax return for 1934, plaintiff showed the entire amount of the dividend declaration ($14,592,230) as having been received in 1934 and deducted that amount in computing its taxable net income for that year.
Section 701 of the Revenue Act of 1934 provides among other things that in determining the adjusted declared value of a corporation's capital stock for the purpose of the capital stock tax for the year subsequent to the original declaration, the corporation shall take the original declared value and make various adjustments thereto, by way of additions and deductions, on account of transactions which occurred during the year subsequent to that for which the original declaration was made. Among the additions provided in that section is the "amount of the dividend deduction allowable for income tax purposes." Section 23 of the same act, 26 U.S.C.A. Int.Rev. Acts, page 671, provides that in computing net income for income tax purposes there shall be allowed as a deduction "the amount received as dividends from a domestic corporation."
Section 701 of the Revenue Act of 1934, 48 Stat. 680, 769, 26 U.S.C.A. Int. Rev. Acts, page 787, provides in part as follows:
"(a) For each year ending June 30, beginning with the year ending June 30, 1934, there is hereby imposed upon every domestic corporation with respect to carrying on or doing business for any part of such year an excise tax of $1 for each $1,000 of the adjusted declared value of its capital stock.
When plaintiff came to prepare its capital stock tax return for the fiscal year ending June 30, 1935, it took the adjusted declared value which it had used for the previous fiscal year and made certain additions to and deductions from that amount as required by section 701, supra, except that when it came to adjust for dividends received during that year it made no addition to its adjusted declared value on account of $9,700,000 of the dividend of $14,592,230 which was declared by the Maine Company December 24, 1934, and payable December 31, 1934, and for which a deduction was taken in computing its taxable net income for 1934. On examination of the return, the Commissioner added that amount to plaintiff's adjusted declared value of its capital stock and on account thereof assessed and collected an additional tax of $9,700 plus interest.
Our only question is whether the Commissioner properly increased plaintiff's adjusted declared value of its capital stock on account of the entire dividend declaration of December 24, 1934.
Plaintiff's position is that these amounts which make up the $9,700,000 should be looked on as if they were dividends when they were transferred to the plaintiff in 1932 and 1933 and that the dividend declaration in 1934 was without significance. In effect it would have us say that when the amounts were transferred by the Maine Company to plaintiff and notes given by plaintiff, there was in fact no liability of plaintiff to the Maine Company but that these amounts were dividends by the Maine Company to plaintiff in 1932 and 1933. We disagree. The Maine Company was formed by plaintiff for its own convenience in order to gain an advantage under the Pennsylvania State capital stock tax law, and after having enjoyed the benefits which resulted from its separate existence it would now have that separateness disregarded. As the Supreme Court said in Higgins v. Smith, 308 U.S. 473, 477, 478, 60 S.Ct. 355, 357, 84 L.Ed. 406:
"* * * the taxpayer, for reasons satisfactory to itself voluntarily had chosen to employ the corporation in its operations. A taxpayer is free to adopt such organization for his affairs as he may choose and having elected to do some business as a corporation, he must accept the tax disadvantages.
"On the other hand, the Government may not be required to acquiesce in the taxpayer's election of that form for doing business which is most advantageous to him. The Government may look at actualities and upon determination that the form employed for doing business or carrying out the challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction as best serves the purposes of the tax statute. To hold otherwise would permit the schemes of taxpayers to supersede legislation in the determination of the time and manner of taxation. It is command of income and its benefits which marks the real owner of property."
See, also, Burnet v. Commonwealth Improvement Co., 287 U.S. 415, 53 S.Ct. 198, 77 L.Ed. 399.
The case of Anketell Lumber Coal Co. v. United States, 1 F. Supp. 724, 76 Ct.Cl. 210, cited by plaintiff, is easily distinguishable from the case at bar. In that case it was a family owned corporation. No notes were given. The withdrawals were not for the benefit of the corporation, but for the personal advantage of the husband and wife who owned more than 95 percent of the capital stock of the company and who completely controlled its policies. The withdrawals which the Commissioner treated as dividends were not repaid to the corporation until after the tax controversy arose. After repayment the corporation again returned the money to the husband and wife who controlled the corporation, thus showing that the entire repayment was a simulated transaction. Besides, the issue involved income and excess profit taxes rather than a capital stock tax.
In the Anketell case and the case at bar the plaintiff sought by self-serving declarations to escape from the apparent face of the record with which such declarations did not tally. This is especially true in the instant case.
When the amounts in question were being received by plaintiff in 1932 and 1933, promissory notes were given to the Maine Company and the amounts were carried on the books of the Maine Company as notes receivable and on the books of the plaintiff as notes payable. To the outside world they appeared as assets in the hands of the Maine Company and as liabilities of the plaintiff. That condition continued until the dividend declaration of December 24, 1934. Plaintiff urges that these amounts were dividends in 1932 and 1933 because it had no intention of repaying them. Plaintiff's president, who was treasurer at the time the notes were issued and who signed them, testified that he considered the notes legal documents but "gave no thought or apprehension as to the necessity of ever having to repay them." But had circumstances developed in which it would have been to the advantage of the plaintiff to treat the notes as binding obligations, it is easy to see how such a contention could well have been advanced and what difficulties the Commissioner would have met had he sought to deal with them as if they were in no sense liabilities. To disregard a transaction carried out in such a manner, when to do so would be to the advantage of the parties who formally for their own other advantage created it, would put a premium on transactions of this kind.
What the Commissioner did was to treat the dividend declaration of December 24, 1934, by the Maine Company as a dividend and the liquidation of the demand notes by plaintiff as the receipt of a dividend by the latter company. Since that action conforms to what was done, we can see no reason for disregarding these formal acts of the parties.
It follows therefore that the petition should be dismissed.
It is so ordered.