Opinion
No. 44104.
October 5, 1942.
Clarence F. Rothenburg, of Washington, D.C. (Hamel, Park Saunders, of Washington, D.C., on the brief), for plaintiff.
S.E. Blackham, 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 J.R. Wood Sons, Incorporated, against the United States to recover excise taxes paid.
Judgment for plaintiff.
Plaintiff sues to recover $9,121.72 with interest, representing excise taxes, penalty, and interest on sales of imported watches by the John R. Wood Sales Corporation alleged to have been erroneously and illegally assessed against and collected from plaintiff, as the alleged importer and seller of watches under section 601 of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev. Acts, page 603, for the period June 20, 1932, to March 31, 1935, inclusive.
The defendant contends that the incorporation and organization of John R. Wood Sales Corporation by plaintiff was simply a scheme or device to evade the payment by plaintiff of the excise tax on sales of watches imported by it and that the sales of the watches by the Sales Corporation after June 20, 1932, were, for tax purposes, sales by plaintiff as the importer thereof and that such sales were taxable to plaintiff as such importer and alleged seller of watches.
Special Findings of Fact.
1. Plaintiff is a New York corporation with its principal office and place of business in New York City.
2. The business in which plaintiff is engaged was started as a partnership in 1850 and consisted of manufacturing plain gold band wedding rings. In 1896, the partnership began manufacturing engraved wedding rings and ring mountings and also began diamond cutting; about 1900, it began manufacturing cuff links and solid gold jewelry of a commercial type; and later, it began the manufacture of lavallières, gold bracelets, and other fancy jewelry.
3. The business of the partnership was strictly that of a wholesale manufacturer, and at first it sold direct to retail stores by mail. About 1919, it began to employ salesmen and by 1928 it had a sales force of twenty men. The great majority of the retail jewelry stores to which it sold its merchandise were the average small stores throughout the United States and it did not cater to stores handling jewelry retailing at higher prices.
4. To increase its volume of business, the partnership in 1928 decided to secure a good watch movement on which it could place its name. It was believed that the salesmen could carry the watch into the retail stores at the same time they sold the rings and other jewelry. After investigation, on March 26, 1928, the partnership signed a contract with the Société Anonyme Louis Brandt Frere (Omega Watch Company), hereinafter sometimes called the "Omega Company," of Switzerland, which manufactured the Omega watch, to act as exclusive agent for that watch and parts in the United States and Alaska.
5. In 1930, the partnership consisted of two members, Rawson L. Wood and St. John Wood, brothers, both of whom were elderly, and at that time it was felt that in the event of the death of one or both of the partners difficulty might be experienced in continuing the business. The partnership was accordingly incorporated on January 30, 1930, under the name of "J.R. Wood Sons, Inc." Rawson L. Wood died in 1930 and St. John Wood in 1932.
6. The merchandising of the Omega watches began in January 1929 and their sponsorship by plaintiff was widely advertised. While the Omega watch was a high-grade article and had a splendid reputation in Europe and other places where it had been sold, it was unknown generally in the United States and plaintiff soon found that the job of merchandising the product was far greater than had been anticipated. The Omega Company was induced to help finance the advertising campaign in this country under an agreement whereby the amounts advanced were to be repaid when the sales of watches reached $100,000. Advances for that purpose were made by the Omega Company to plaintiff until June 20, 1932, and to the John R. Wood Sales Corporation for at least two or three years thereafter. The watch was a high-priced product, occupying a price range of $36 to $120, whereas the jewelry sold by the partnership and by plaintiff was low-priced though of a high quality. During the latter part of 1929 the partnership began to experience difficulty with the merchandising of the watches because a jeweler who was willing to stock them insisted that he have the exclusive agency therefor. This caused embarrassment as the partnership was selling its other products to more than one and, in some cases, to all the jewelers in a given town. The same difficulty continued after the partnership was succeeded by plaintiff. In some cases jewelers in a given town who previously had purchased rings from the partnership and plaintiff discontinued such purchases when they found that an exclusive agency for the watch had been given to another jeweler in the same town and they were unable to secure such a watch when it was desired by one of their customers. Another difficulty experienced by the partnership and plaintiff was that when an effort was made to interest one of the better stores in a given town or city in taking the agency for the Omega watch it was very difficult to convince such a store that an organization which sold its other products to various concerns in the lower-priced field would not also sell the Omega watch in a similar manner.
7. Because of the difficulties referred to in the preceding finding, early in 1930 certain officials and employees of plaintiff began to discuss the question of forming a separate corporation, with a different name, to handle the watch business. Another purpose in the formation of a separate corporation was to limit the liability of plaintiff to the Omega Company for the money advanced by the latter on advertising the Omega watch. The creation of a new corporation to handle the watch business was first advocated in 1930 by the manager of the watch department of plaintiff who was familiar with the difficulties that were being experienced in merchandising the Omega watch. One suggestion advanced was that the word "Omega" appear in the name of the proposed corporation which, it was urged, would give more publicity to the Omega watch, and would also serve to show a separation of the watch business from the other business being carried on by plaintiff. Another argument advanced by the manager of the watch department was that rings and watches were so different it was not feasible to have them sold by salesmen of the same corporation.
February 16, 1932, the manager of the watch department wrote a memorandum to plaintiff's treasurer reading in part as follows:
"I had a long talk with Jack Kohler today, and he reverted to the same old topic of selling Omega under the name Wood. He says it is a distinct disadvantage in the fine stores, where it is generally believed that Wood sells everybody, and so Omega cannot be kept exclusively a product for the fine stores.
"In view of the fact that Omega can only be sold on the basis of being an exclusive product for high-grade stores, I am sure that there is a lot in what Jack says.
"Why don't we form a new corporation and get away from criticism by Wood's customers and set aside to a great extent the hesitancy of fine stores?
"We run the Omega department entirely as a separate thing now, so why not go ahead and do the job right?
"Could we see W.W.S. [plaintiff's vice president] about this?"
April 12, 1932, the same manager wrote a memorandum to plaintiff's vice president reading as follows:
"Have been trying to get in touch with you to advise receipt of cable from Omega telling us the timers for Olympic games will be here in time — so that's one worry out of the way.
"By the way, here is another instance where we could get publicity for Omega products if only we were a separate company, but I know that all the publicity will be addressed to J.R. Wood Sons, and Omega will just be incidental.
"Have you given any more thought to the proposition of change?"
At the same time, plaintiff's manager and treasurer discussed the matter of forming the new corporation with plaintiff's officers and it was suggested that a convenient time for the organization of the new corporation to take over and handle the watch business would be when inventories were taken at the end of the fiscal year ending July 31, 1932.
8. As hereinbefore shown, a separate corporation to take over and handle the watch business had been and was being urged by the officials and manager in charge of plaintiff's business, but plaintiff's directors, who were very conservative, were not at first convinced of the necessity of organizing a separate corporation to handle the watch business. However, as the merchandising difficulties and problems continued to exist without improvement they realized, some time prior to June 20, 1932, and independently of any tax considerations, the importance of organizing and having a separate corporation to take over and handle the Omega watch business. When the matter was first proposed in 1930 the directors felt that the seriousness of the merchandising problems and difficulties were somewhat exaggerated, but as the discussions continued and the matter was considered the officers and directors became more and more convinced that the only real solution of the problems and difficulties was to create a separate corporation to take over and handle the watch business. Discussions of the problem between plaintiff's officers and directors thereafter continued during 1931 and the early part of 1932 but no formal action was taken by plaintiff's directors authorizing the formation of the separate corporation until June 20, 1932. Plaintiff's officers came to the conclusion in the early part of 1932, and sometime prior to June 20, that a separate corporation should be created. It had been suggested that a good time to take such action would be the end of the fiscal year. However, when, on the morning of June 20, 1932, it was brought to the attention of plaintiff's vice president who was the officer in active and immediate charge of plaintiff's business, that a tax on the sale by an importer of imported merchandise, which tax would become effective the following day, the vice president decided that the separate corporation should be immediately authorized and organized. Tax matters or the effect of organizing a separate corporation upon plaintiff's federal taxes had not at any time entered into the matter, discussions or considerations which had led plaintiff's officers and directors to come to the conclusion that the separate corporation should be organized. On the morning of June 20, plaintiff's vice president communicated with plaintiff's directors and its attorney advising them of his information concerning the excise tax, and requested that if the separate corporation was to be created and organized the necessary action be immediately taken. This was done. The separate corporation known as the "J.R. Wood Sales Corporation" was formally authorized and was organized on June 20, 1932. The "Sales Corporation" had a capital stock of $5,000 all of which was issued to plaintiff for cash.
9. The reasons for and the underlying purpose of the authorization and organization of the J.R. Wood Sales Corporation were legitimate business reasons and purpose. Except for these business reasons and purpose the separate corporation would not have been authorized and organized because of the imposition of the federal excise tax upon the sale by the importer of imported merchandise.
10. Upon the formation of the Sales Corporation and on the same day, plaintiff and the Sales Corporation entered into an agreement under which the latter purchased the entire watch business from plaintiff for $60,000, and gave in payment therefor its note dated June 20, 1932, for $60,000, payable on demand. The watch business consisted of the watch inventory comprising watch movements only, watch cases only, complete watches, repair parts, and certain assets and liabilities having to do with the watch business. The miscellaneous assets and liabilities transferred were set up on the separate books of the Sales Corporation in July 1932, as follows:
Deferred advertising ................ $ 875.00 Duty deferred ....................... 623.25 Furniture Fixtures ................ 3,232.30 Omega, Special Advertising Account .. 947.01 Omega, Tools Dies ................. 350.00
Advance Acc't, John H. Kohler ....... 68.18 J.R. Wood Sons, Inc ...................... $2,108.48 Louis Brandt Frere ....................... 2,496.48 Reserve for Depreciation, Furn. Fixt ..... 767.64 Omega Watch Boxes c. ...................... 723.14 To transfer all accounts pertaining to Omega activities from J.R. Wood Sons, Inc.
11. At the time of the transfer, plaintiff had an unusually large inventory of watches, some of which were several years old and had to be placed on the market in competition with new merchandise coming in at lower prices in new styles and designs. Included in the inventory were some 400 or 500 white gold watches. By that time the popular style color had changed to red and yellow gold and in order to sell the movement it was necessary to purchase a new type of case. In fixing the value of $60,000 for the inventory the employees and officials of plaintiff undertook to arrive at an approximation of a bulk cash value of those assets, taking into consideration the age of the inventory, its salability, and the poor record which that watch business had shown up to that time, though the valuation was not fixed on the basis of a detailed appraisal and it was substantially less than the existing book value.
On the open accounts pertaining to the watch business which were assigned to the Sales Corporation, the customer paid plaintiff on the invoices which had been rendered before the transfer and these amounts were credited to the Sales Corporation and applied in partial payment of the accounts receivable transferred. This procedure continued until these accounts receivable were practically eliminated.
12. No formal assignment was made to the Sales Corporation of the contract or agreement which plaintiff had with the Omega Company under which it acted as agent or distributor of the Omega watch in this country, but after the transfer of the watch business to the Sales Corporation plaintiff notified the Omega Company of the transfer and thereafter the Omega Company recognized and dealt with the Sales Corporation as its representative for the sale of the watches in this country. All orders for the purchase of watches from the Omega Company after June 20, 1932, were placed by the Sales Corporation and all correspondence concerning the purchase and importation of the watches was carried on between the Sales Corporation and the Omega Company. All orders, upon being accepted and filled by the Omega Company, were consigned to the Sales Corporation.
13. The offices of plaintiff were in a building in Brooklyn where the factory was located when the Sales Corporation was organized. About one-third or one-half of the fourth floor of the building which had theretofore been occupied by the watch department of plaintiff was occupied by the Sales Corporation without any physical change. While the Sales Corporation maintained a sort of sales room, practically no customers came to Brooklyn. The vaults and office furniture of the Sales Corporation were the same and occupied the same space as had been used by the watch department of plaintiff immediately prior to the transfer.
14. The officers and directors of the Sales Corporation were the same as the officers and directors of plaintiff but because the Sales Corporation had been formed at a different time, they had been separately elected. Generally the Sales Corporation and plaintiff had their annual meetings on the same day although not at the same time. Subsequent to the formation of the Sales Corporation there were meetings of its directors at a time when there were no meetings of plaintiff when decisions were made on policy.
15. After the watch business had been transferred to the Sales Corporation it was found that stores could be selected as watch agencies which were strong enough and large enough to recommend a fine watch on their own reputation and the Sales Corporation was more successful in selling the watches to one jeweler in each town than the partnership or plaintiff had been able to do prior to June 20, 1932.
After June 20, 1932, the salesmen of plaintiff and the salesmen of the Sales Corporation operated in their own respective fields and dealt only with the articles of the respective corporations. Salesmen of the plaintiff were not permitted to sell the Omega watch and when requests were received by them from a customer for a watch a salesman for the Sales Corporation would call on the interested jeweler.
16. Except in one or two minor instances where a common service was used by the two corporations, all disbursements on behalf of the Sales Corporation were made by that corporation from its own bank account. The Sales Corporation required advances from time to time over the period of its existence to meet operating expenses and advances for that purpose were made by plaintiff and charged to the Sales Corporation on the books of plaintiff. The Sales Corporation rendered monthly statements to its customers in its own name and all invoices made up after June 20, 1932, were rendered in the name of the Sales Corporation. The Sales Corporation kept separate financial books, had its own corporate seal, and rendered its own financial statements separate from the statements of plaintiff. However, the bookkeeping was done by the same employees who did similar work for plaintiff and who had performed this work prior to the formation of the Sales Corporation.
17. The Sales Corporation paid plaintiff $2,000 a year for the occupancy of the office, storeroom space, and for the general bookkeeping, clerical, and administrative work which was done by plaintiff for that corporation. The figure of $2,000 was arrived at by measuring the space occupied by the Sales Corporation to which was added an amount for the bookkeeping, clerical, and administrative work. The charge of $2,000 was adequate, to compensate for the services rendered.
18. The Sales Corporation carried its own insurance, had vaults for its merchandise separate and apart from the vaults of plaintiff, and had its own customshouse broker. Soon after its incorporation the Sales Corporation advised jewelers of the transfer of the watch business to it from plaintiff, ran advertisements, and sent advertisements to the Omega customers listed on its books. The sales manager of the Sales Corporation often requested that the offices of the Sales Corporation be moved to New York City in order to widen the separation of the watch business and the ring business but for reasons of economy this request was never complied with.
While the sales manager of the watch department of plaintiff became the sales manager of the Sales Corporation upon its incorporation, in the latter capacity he gave his entire time to the Sales Corporation and carried on that work entirely separate from plaintiff. This was also true of his assistants and the separate group of salesmen who worked under his supervision, and these employees of the Sales Corporation were paid solely by that corporation. All the details of purchasing and corresponding were handled by the Sales Corporation apart from plaintiff.
19. The watch business of plaintiff which was transferred to the Sales Corporation had not been successful prior to its transfer on June 20, 1932, and it was likewise unsuccessful after the transfer, the Sales Corporation having sustained substantial losses in each year of its existence and having a deficit at December 31, 1936, of $59,385.67. Efforts were made by the officials of the Sales Corporation to interest additional capital in the business, including efforts to have the Omega Company put additional capital into the Sales Corporation, but they were unsuccessful. Efforts were also made by officials of the Sales Corporation to sell the watch business. There was an agreement between the Sales Corporation and the Omega Company that if the latter found an agency which would take over the watch business, the purchaser would first have to be acceptable to the Sales Corporation. The Sales Corporation finally sold the entire watch business to Norman M. Morris, Inc., in 1937 and the Sales Corporation was dissolved October 18, 1937. The proceeds of the liquidation of the Sales Corporation were paid to plaintiff in discharge of balances owing to it. Among the liabilities outstanding at the date of dissolution was the note for the $60,000 which had been given to plaintiff by the Sales Corporation at the time the watch business was transferred to it.
20. On invoices rendered by the Sales Corporation subsequent to June 20, 1932, covering sales of complete watches which had been obtained from plaintiff, no tax was computed or charged to the customer on those items, but on invoices covering in whole or in part merchandise imported by the Sales Corporation or assembled by it subsequent to June 20, 1932, a 10 percent excise tax levied under section 605 of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev. Acts, page 609, was charged the customer. Consistent with such invoices, the Sales Corporation made excise-tax returns and paid excise taxes on sales of items imported by it after June 20, 1932, and on movements of watches which had been acquired on June 20, 1932, from plaintiff and cased by the Sales Corporation subsequent to its formation, but did not include a tax on the sale of complete watches which were transferred to it by plaintiff on June 20, 1932.
21. July 27, 1932, and September 22, 1932, plaintiff filed its excise tax returns under Title IV of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev. Acts, page 603 et seq., for the months of June and August 1932, respectively.
22. May 16, 1935, a representative of the Commissioner of Internal Revenue transmitted to plaintiff a report showing a proposed assessment of excise tax, penalty, and interest against plaintiff of $8,111.16 on account of watches which had been sold by the Sales Corporation from June 20, 1932, to March 1935, inclusive, which watches had been transferred by plaintiff to the Sales Corporation in the transaction heretofore referred to. June 17, 1935, the Commissioner made an assessment of tax, penalty, and interest against plaintiff of $8,177.89 on account of the liability just referred to and on June 18, 1935, and July 15, 1935, the Collector issued notice and demand for payment. After the filing of a claim for abatement which was rejected except for an allowance of $44.22, plaintiff paid the foregoing assessment July 16, 1936, in the amount of $8,133.67 which included excise taxes aggregating $6,703.25, $80.50 as a statutory penalty of 25 per cent alleged to be due for failure to file excise-tax returns for the months of June and August 1932, and interest in the amount of $1,349.92 on the additional assessment at 1 per cent per month from the alleged due dates to June 10, 1935.
July 16, 1936, plaintiff paid an additional amount of $988.05, which included $406.68 as a statutory penalty of 5 per cent for failure to pay the assessment referred to in the preceding paragraph within ten days after notice and demand, and $581.37, representing interest on the assessment of $8,133.67 from June 10, 1935, to July 16, 1936.
23. The excise taxes of $6,703.25, referred to in the preceding finding, were determined by the Commissioner to be due from plaintiff with respect to sales of complete watches which had been imported and assembled by the partnership or plaintiff prior to June 20, 1932, but which had been transferred by plaintiff to the Sales Corporation on June 20, 1932, and subsequently sold by the Sales Corporation in the period from June 1932 to March 1935, inclusive. With respect to the sales by the Sales Corporation of all other watches during that period (including watches, movements for which were transferred by plaintiff on June 20, 1932, but which were placed in cases by the Sales Corporation), the Sales Corporation has duly paid the Federal excise tax thereon, and no part thereof was ever repaid or refunded. Such taxes are not in controversy in this proceeding.
24. May 17, 1937, plaintiff filed a claim for refund of $9,121.72 representing taxes, penalty, and interest collected on July 16, 1936, as heretofore shown. That claim was rejected by the Commissioner September 8, 1937. November 9, 1937, plaintiff filed a second claim for refund for the same taxes, penalty, and interest and that claim was rejected January 22, 1938.
25. The Sales Corporation did not include any of the additional excise taxes mentioned in the above claims for refund in the price of articles with respect to the sales for which the taxes were collected. No portion of the amount of $9,121.72 covered by the claims for refund has ever been refunded or credited to plaintiff by the defendant or repaid to plaintiff by the Sales Corporation.
Upon the facts established by the record and set forth in the findings, we are of opinion that plaintiff is entitled to recover the excise taxes collected in the amount of $6,703.25 and interest of $1,349.92, together with $80.50 as the statutory penalty of twenty-five (25) percent alleged by the defendant to be due for failure of plaintiff to file excise tax returns for the months of June and August 1932. The incorporation and organization of the John R. Wood Sales Corporation by plaintiff were brought about by and were based upon a legitimate business reason resulting from certain merchandising difficulties which plaintiff had been, and then was, experiencing, as set forth in the findings. The organization of this corporation did not have for its real or primary purpose the avoidance or evasion by plaintiff of excise taxes on sales of imported merchandise. (Findings 7, 8, 9.) The facts show that in the early part of 1932, and prior to June 20 of that year, a decision to form a new corporation and to transfer the watch business to it had been reached by plaintiff's officers but no formal directors' meeting had, as yet, been held. On the morning of June 20, 1932, plaintiff's vice-president, who, with the manager of the watch department, had been immediately in charge of and familiar with the situation and the merchandising problems, secured the formal approval of the Board of Directors to the formation of a new corporation for the handling of the watch business, and the John R. Wood Sales Corporation was organized with a capital stock of $5,000, all of which was issued to plaintiff for cash. On the same day, plaintiff and the Sales Corporation entered into an agreement under which the latter purchased the entire watch business from plaintiff for $60,000 and gave in payment therefor his demand note for $60,000.
The watch business was only a portion of plaintiff's manufacturing and wholesale jewelry business. The watch business consisted of the watch inventory comprising movements and cases only, complete watches, repair parts, and certain assets and liabilities having to do only with the watch part of the business. Plaintiff's business as a wholesale manufacturer of low-priced jewelry of high quality, which existed as a partnership until January 30, 1930, started in 1850 and during the period subsequent thereto it successfully sold its merchandise to the average small stores throughout the United States. In 1928 it became the exclusive sales agent for the Omega watch, which it imported. This venture resulted in serious merchandising difficulties in plaintiff's business. These difficulties are described in the findings. By reason thereof certain officials of plaintiff, including the manager of the Watch Department who first advocated the idea, discussed the advisability of forming a separate organization with a different name to handle the watch business so as to overcome these merchandising problems. This matter was considered and discussed among plaintiff's officers and directors over a considerable period of time prior to June 20, 1932. Plaintiff's directors were conservative and were not convinced at first of the necessity for the organization of a separate corporation to handle the watch business. The merchandizing difficulties continued and became such that the directors came to realize the importance of having a separate organization to take over and operate the watch business, and formal action to that end was taken on June 20, 1932. In these circumstances and in view of the facts disclosed by the record, this case is distinguishable from Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355; Higgins v. Smith, 308 U.S. 473, 60 S.Ct. 355, 84 L.Ed. 406; and Griffiths v. Helvering, 308 U.S. 355, 60 S.Ct. 277, 84 L.Ed. 319; Black, Starr Frost-Gorham, Inc., v. United States, 39 F. Supp. 109, 94 Ct.Cl. 87, and other similar cases upon which the defendant relies. We think the present case is within the rule announced by the court in Chisholm v. Commissioner of Internal Revenue, 2 Cir., 79 F.2d 14, at pages 15 and 16 (certiorari denied 296 U.S. 641, 56 S.Ct. 174, 80 L.Ed. 456), in which the court said:
" The question always is whether the transaction under scrutiny is in fact what it appears to be in form; a marriage may be a joke; a contract may be intended only to deceive others; an agreement may have a collateral defeasance. In such cases the transaction as a whole is different from its appearance. True, it is always the intent that controls; and we need not for this occasion press the difference between intent and purpose. We may assume that purpose may be the touchstone, but the purpose which counts is one which defeats or contradicts the apparent transaction, not the purpose to escape taxation which the apparent, but not the whole, transaction would realize. In Gregory v. Helvering, supra, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 [97 A.I.R. 1355], the incorporators adopted the usual form for creating business corporations; but their intent, or purpose, was merely to draught the papers, in fact not to create corporations as the court understood that word. That was the purpose which defeated their exemption, not the accompanying purpose to escape taxation; that purpose was legally neutral. Had they really meant to conduct a business by means of the two reorganized companies, they would have escaped whatever other aim they might have had, whether to avoid taxes, or to regenerate the world.
" In the case at bar the purpose was certainly to form an enduring firm which should continue to hold the joint principal and to invest and reinvest it. * * *" [Italics supplied.]
In the case at bar the transaction was in fact what it appeared to be in form. The new corporation was not merely a shell or a scheme to avoid taxes. It was not intended as such. The purpose and intent in reality were to conduct the watch business by a separate corporation to the end that the merchandising problems and difficulties which had been experienced might be overcome and the watch business of the new corporation was so conducted. The fact that the organization of the new corporation had some effect on the amount of tax which plaintiff would otherwise have to pay does not, as was held by the court in Chisholm v. Commissioner of Internal Revenue, supra, require or justify the holding that plaintiff should nevertheless pay the excise tax upon the sales of watches by the new corporation.
In Superior Oil Co. v. State of Mississippi, 280 U.S. 390, 395, 50 S.Ct. 169, 170, 74 L.Ed. 504, the court said: "The fact that it desired to evade the law, as it is called, is immaterial, because the very meaning of a line in the law is that you intentionally may go as close to it as you can if you do not pass it."
In Bullen v. State of Wisconsin, 240 U.S. 625, 630, 36 S.Ct. 473, 474, 60 L.Ed. 830, the court also said: "We do not speak of evasion, because, when the law draws a line, a case is on one side of it or the other, and if on the safe side is none the worse legally that a party has availed himself to the full of what the law permits. When an act is condemned as an evasion, what is meant is that it is on the wrong side of the line indicated by the policy if not by the mere letter of the law."
A case involving the organization of a separate corporation cannot be condemned as an evasion merely because there is no change in location of its headquarters or because it does not have new and separate officers if there is a good business reason back of what was done and upon which reason the action taken was substantially based. Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355, and other like cases, will, upon a careful reading, show this to be true beyond question. Thus the court, in the Gregory case, 293 U.S. at page 469, 55 S.Ct. at page 267, said: "The legal right of the taxpayer to decrease the amount of what otherwise would be his taxes, * * * cannot be doubted. United States v. Isham, 17 Wall. 496, 506, 21 L.Ed. 728; Superior Oil Co. v. [State of] Mississippi, 280 U.S. 390, 395, 396, 50 S.Ct. 169, 74 L.Ed. 504; Jones v. Helvering, 63 App.D.C. 204, 71 F.2d 214, 217. But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended." Certainly what was done for the real reason it was done in the case at bar was something which the statute contemplated and intended might be done. There was a real and good business reason and the action taken was to carry out that reason. The plaintiff may have come close to the line when it incorporated and organized the Sales Corporation at a time when a sales tax was soon to take effect but it did not pass the line, because the proof is sufficient to show that the Sales Corporation would have been created independently of the tax matter.
In the Gregory case, which is the basis of the subsequent cases cited and relied upon the Court, after making the above quoted statement, pointed out, page 469 of 293 U.S., page 267 of 55 S.Ct., 79 L.Ed. 596, 97 A.L.R. 1355, that the statute speaks of a transfer in pursuance of a plan of reorganization, "and not a transfer * * * by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here."
The court then said: "Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose — a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character."
What was said and held in the Gregory and other like cases supports plaintiff's position. Thus we come to the old question of degree, but we should not lose sight of the substantial business purpose which was the underlying reason for plaintiff's action in this case, and get confused by names, faces or form, and lean too far to the assumption that the Sales Corporation was a mere fiction, and should be looked through and ignored. As the court said in Klein v. Board of Supervisors, 282 U.S. 19, 23, 24, 51 S.Ct. 15, 75 L.Ed. 140, 73 A.L.R. 679: "Thus we come to the usual question of degree and of drawing a line where no important distinction can be seen between the nearest points on the two sides, but where the distinction between the extremes is plain. Hudson County Water Co. v. McCarter, 209 U.S. 349, 355, 28 S.Ct. 529, 52 L.Ed. 828, 14 Ann.Cas. 560. * * * But it leads nowhere to call a corporation a fiction. If it is a fiction it is a fiction created by law with intent that it should be acted on as if true. The corporation is a person and its ownership is a nonconductor that makes it impossible to attribute an interest in its property to its members." It is only, as the decided cases show, where the new corporation is a sham or scheme or a mere device intended primarily and fundamentally to bring about evasion that the separate corporate entity will be ignored, — mere semblance of a legitimate business motive is not enough. There was a real business purpose and motive in the J.R. Wood Sons action, and the mere fact that the tax problem or motive may have been present at the time final action was taken June 19, 1932 and may have served to speed action is not enough to condemn what was done as being entirely barren of substance. The evidence of record shows real substance from a business standpoint. If what was done be looked at from an income tax standpoint, it seems no one would under the circumstances question the propriety and legality of the organization of the Sales Corporation. It is only because a sales tax was about to go into effect that the tax motive is overemphasized. The fact that a new sales tax instead of an existing income tax was involved and was being newly imposed cannot serve to destroy the propriety and legality of what was done. The Agent of the Commissioner of Internal Revenue who investigated plaintiff's excise tax liability in May, 1935, found and reported to the Commissioner that upon the facts it was probably true that plaintiff would have organized the John R. Wood Sons Sales Corporation even if the sales tax on imported watches had not been imposed. The Commissioner's written findings and decisions denying plaintiff's protests and claim for refund in respect of the tax against it show that he did not deny this. But because the Sales Corporation was organized at the time it was and because plaintiff and the new corporation had the same offices, directors and officers, he held that the Sales Corporation was only an "agent" of plaintiff. The Sales Corporation was an "agent" of plaintiff only in the sense that any corporation is the agent of its stockholders from whom it receives cash or property. The fact that two corporations carry on their separate businesses at the same location and with the same officers and directors may be evidence of a very close connection between the two corporations, and, in some cases, may be some evidence of evasion of the tax as that term is defined by the courts, but it is not conclusive. That situation may exist and be consistent with permissible and lawful action, as we think was the case here. The evidence here covers the point. Plaintiff was in the midst of the depression. The proof shows that the Sales Corporation continued to carry on its business in the same building in which plaintiff had formerly carried on its watch business and that plaintiff and the Sales Corporation had the same officers, directors and offices for economic reasons. The question of when and under what circumstances a separate corporation should be ignored for tax purposes is an old one. Congress has long declined to say by legislation that, if the effect of reducing taxes enters into transfers of property or organization of corporations having substantial and legitimate business purposes, such transactions should be ignored for tax purposes. It is a question of intent and degree. Each case stands or falls on its facts. The courts have always carefully followed the rule that such transactions should not be ignored except where clearly justified on the ground that tax evasion was the underlying or predominant motive so that the action taken was outside the intent, if not the strict letter, of the taxing statute. We think the present case did not go beyond what the law permitted.
Judgment will be entered in favor of plaintiff for $9,121.72, with interest as provided by law. It is so ordered.