Breitfeller Sales, Inc.
v.
Comm'r of Internal Revenue

Tax Court of the United States.Sep 13, 1957
28 T.C. 1164 (U.S.T.C. 1957)
28 T.C. 1164T.C.

Docket No. 56525.

1957-09-13

BREITFELLER SALES, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Robert A. Littleton, Esq. , and D. L. Mitchell, Esq. , for the petitioner. James E. Markham, Jr., Esq. , for the respondent.


There having existed a reasonable requirement of petitioner's business for the accumulation of its surplus, held, on the facts, petitioner was not formed or availed of during the taxable years for the purpose of avoiding surtax on its shareholder within the meaning of section 102, I. R. C. 1939. Robert A. Littleton, Esq., and D. L. Mitchell, Esq., for the petitioner. James E. Markham, Jr., Esq., for the respondent.

Respondent determined deficiencies in petitioner's income tax of $56,832.93 and $58,577.12 for the calendar years 1947 and 1948, respectively. The only issue is whether petitioner is subject to tax under section 102 as having been availed of during the taxable years to prevent the imposition of surtax upon its sole stockholder by permitting earnings and profits to accumulate beyond the reasonable needs of its business instead of being divided or distributed. Petitioner concedes other adjustments set forth in the deficiency notice.

FINDINGS OF FACT.

Certain facts are stipulated and are hereby found.

Petitioner, a corporation organized in 1931 under the laws of the State of New York, maintained its principal office in Queens Village, New York. Petitioner kept its books of account on the accrual method and on a calendar year basis.

Petitioner filed its returns for 1947 and 1948 with the collector of internal revenue for the first district of New York. On September 7, 1955, respondent sent a registered mail notification to petitioner, pursuant to section 534, I. R. C. 1954, that the notice of deficiency forming the basis of this proceeding set forth an amount with respect to section 102 of the Internal Revenue Code of 1939.

At all material times Victor Breitfeller, hereafter called Breitfeller, held all of petitioner's outstanding stock. At all material times petitioner's board of directors consisted of Breitfeller, president and treasurer; Josephine Breitfeller (his wife), vice president; and Fred Heller, secretary.

The deficiency in income tax attributable to Breitfeller in 1947 and attributable to Breitfeller and his wife in 1948 (joint return) would have been $135,967.55 and $114,671.08, respectively, if petitioner had distributed surplus earnings for the respective years.

Petitioner sold Pontiac automobiles at retail under a General Motors franchise for an area with a population of 75,000 to 100,000. Breitfeller completely controlled petitioner's operations.

The following schedule shows petitioner's accumulated earnings and profits together with the value of securities held and dividends declared:

+-----------------------------------------------------+ ¦Year¦Net profit ¦Dividends ¦Dec. 31 ¦Securities¦ +----+-----------+--------------+----------+----------¦ ¦ ¦after taxes¦paid ¦surplus ¦ ¦ +----+-----------+--------------+----------+----------¦ ¦ ¦ ¦ ¦ ¦ ¦ +----+-----------+--------------+----------+----------¦ ¦ ¦ ¦ ¦ ¦ ¦ +----+-----------+--------------+----------+----------¦ ¦1931¦$76.64 ¦ ¦$76.64 ¦ ¦ +----+-----------+--------------+----------+----------¦ ¦1932¦63.60 ¦ ¦2,514.98 ¦$6,399.17 ¦ +----+-----------+--------------+----------+----------¦ ¦1933¦13,288.73 ¦ ¦13,339.62 ¦6,399.17 ¦ +----+-----------+--------------+----------+----------¦ ¦1934¦1,603.21 ¦ ¦4,317.83 ¦6,399.17 ¦ +----+-----------+--------------+----------+----------¦ ¦1935¦9,890.26 ¦ ¦13,945.16 ¦6,399.17 ¦ +----+-----------+--------------+----------+----------¦ ¦1936¦696.15 ¦ ¦6,405.10 ¦6,399.17 ¦ +----+-----------+--------------+----------+----------¦ ¦1937¦5,877.17 ¦ ¦12,540.16 ¦ ¦ +----+-----------+--------------+----------+----------¦ ¦1938¦2,344.18 ¦ ¦14,914.17 ¦ ¦ +----+-----------+--------------+----------+----------¦ ¦1939¦13,890.40 ¦ ¦29,715.78 ¦ ¦ +----+-----------+--------------+----------+----------¦ ¦1940¦8,593.80 ¦ ¦38,309.61 ¦ ¦ +----+-----------+--------------+----------+----------¦ ¦1941¦44,684.12 ¦ ¦52,751.95 ¦ ¦ +----+-----------+--------------+----------+----------¦ ¦1942¦9,531.21 ¦ ¦56,367.62 ¦ ¦ +----+-----------+--------------+----------+----------¦ ¦1943¦23,322.15 ¦ ¦66,296.58 ¦ ¦ +----+-----------+--------------+----------+----------¦ ¦1944¦33,202.43 ¦ ¦90,695.81 ¦ ¦ +----+-----------+--------------+----------+----------¦ ¦1945¦12,368.80 ¦ ¦89,262.91 ¦25,037.50 ¦ +----+-----------+--------------+----------+----------¦ ¦1946¦108,394.81 ¦ ¦198,648.71¦76,238.29 ¦ +----+-----------+--------------+----------+----------¦ ¦1947¦173,178.51 ¦ ¦355,642.37¦76,238.29 ¦ +----+-----------+--------------+----------+----------¦ ¦1948¦176,093.96 ¦1 $41,293.08¦486,915.74¦277,769.54¦ +----+-----------+--------------+----------+----------¦ ¦1949¦158,376.83 ¦25,000.00 ¦616,559.01¦377,769.54¦ +----+-----------+--------------+----------+----------¦ ¦1950¦177,881.09 ¦60,000.00 ¦731,086.86¦382,214.78¦ +----+-----------+--------------+----------+----------¦ ¦1951¦100,821.81 ¦30,000.00 ¦799,840.61¦580,461.99¦ +----+-----------+--------------+----------+----------¦ ¦1952¦67,322.52 ¦30,000.00 ¦839,185.87¦581,443.48¦ +----+-----------+--------------+----------+----------¦ ¦1953¦61,552.29 ¦30,000.00 ¦867,781.96¦581,227.06¦ +----+-----------+--------------+----------+----------¦ ¦1954¦7,845.54 ¦10,000.00 ¦859,767.62¦581,560.64¦ +----+-----------+--------------+----------+----------¦ ¦1955¦4,792.77 ¦2,500.00 ¦860,717.61¦479,060.88¦ +----+-----------+--------------+----------+----------¦ ¦ ¦ ¦ ¦ ¦ ¦ +----+-----------+--------------+----------+----------¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------+ FN1 Nontaxable stock dividend.

Petitioner had ‘working capital agreements' in 1947 and 1948 with General Motors which called for the retention of $162,862 of working capital for each year. General Motors never enforced the ‘working capital agreements' nor did petitioner expect any enforcement. Petitioner sold 484 new automobiles in 1947 and 461 in 1948, but petitioner had hoped to purchase at least 50 automobiles from General Motors for sale in each year. The parties to the ‘working capital agreements' entered into them anew each year to take account of current economic conditions.

The following schedule shows current assets, current liabilities, the excess of such assets over such liabilities, and the excess of the net current assets so determined over the requirements for working capital under the agreements with General Motors:

+-------------------------------------------------------------------+ ¦ ¦Dec. 31, 1947¦Dec. 31, 1948¦ +---------------------------------------+-------------+-------------¦ ¦ ¦ ¦ ¦ +---------------------------------------+-------------+-------------¦ ¦Current assets: ¦ ¦ ¦ +---------------------------------------+-------------+-------------¦ ¦Cash ¦$305,906 ¦$203,567 ¦ +---------------------------------------+-------------+-------------¦ ¦Receivables ¦1 50,613 ¦1 61,486 ¦ +---------------------------------------+-------------+-------------¦ ¦Inventories ¦46,391 ¦73,719 ¦ +---------------------------------------+-------------+-------------¦ ¦Prepaid expenses and deferred ¦ ¦ ¦ +---------------------------------------+-------------+-------------¦ ¦charges ¦28,261 ¦37,921 ¦ +---------------------------------------+-------------+-------------¦ ¦Securities ¦76,238 ¦277,770 ¦ +---------------------------------------+-------------+-------------¦ ¦Total current assets ¦507,409 ¦654,463 ¦ +---------------------------------------+-------------+-------------¦ ¦Current liabilities: ¦ ¦ ¦ +---------------------------------------+-------------+-------------¦ ¦Payables ¦2 77,065 ¦2 63,592 ¦ +---------------------------------------+-------------+-------------¦ ¦Income tax payable ¦106,142 ¦107,929 ¦ +---------------------------------------+-------------+-------------¦ ¦Total current liabilities ¦183,207 ¦171,521 ¦ +---------------------------------------+-------------+-------------¦ ¦Current assets less current liabilities¦324,202 ¦482,942 ¦ +---------------------------------------+-------------+-------------¦ ¦General Motors requirements ¦162,862 ¦162,862 ¦ +---------------------------------------+-------------+-------------¦ ¦Excess of net current assets over ¦ ¦ ¦ +---------------------------------------+-------------+-------------¦ ¦General Motors requirements ¦161,340 ¦320,080 ¦ +---------------------------------------+-------------+-------------¦ ¦ ¦ ¦ ¦ +---------------------------------------+-------------+-------------¦ ¦ ¦ ¦ ¦ +-------------------------------------------------------------------+ FN1 Amounts per stipulated schedule; balance sheets on income tax returns show totals of $52,454 and $45,530, respectively.FN2 Includes accounts payable, accrued expenses, and deposits. Balance sheets on income tax returns show totals of $77,303 and $64,335, respectively.

In 1947 and 1948, the seller's market allowed a dealer to sell a new car in time to pay for its purchase. Dealers did not find it necessary to accept trade-ins, or if accepted, trade-ins could be disposed of immediately.

During 1947, petitioner expended $2,579 and in 1948, $34,366 in acquiring additional facilities. Petitioner had other more indefinite plans for acquiring further facilities which had not materialized during 1947 and 1948.

Since before 1941, petitioner considered in an indefinite way the desirability of financing its own sales, but those plans have not materialized. Out of 120 General Motors dealers in the New York and Boston areas, only one dealer of a size incomparable to petitioner combined the finance business with the automobile retail business.

Petitioner voluntarily relinquished the St. Albans, New York, area from its franchise in 1934. Since then the area with a population of 75,000 to 100,000 remained unfranchised or ‘open.’ Petitioner never requested a General Motors franchise covering the St. Albans area if and when such franchise was issued. General Motors franchise agreements, being nonexclusive, allow a dealer to solicit business anywhere in the country. Acquisition of a St. Albans franchise by petitioner would require expenditures of $200,000 to $250,000. Acquisition of a St. Albans franchise by another dealer would be detrimental to petitioner.

Breitfeller held all of the stock of Breitfeller Motors, Inc., an automobile agency distinct from petitioner. In 1947 and 1948 he knew the effect of section 102 of the Internal Revenue Code of 1939. He borrowed money from petitioner throughout its existence including the years 1947 and 1948. He paid no interest during those years.

In 1947 and 1948 petitioner invested in securities unrelated to its business.

An examination of petitioner's 1947 and 1948 income tax returns was begun with the knowledge of petitioner's officers prior to March 15, 1951. Petitioner's minute book includes minutes of no annual meetings of the directors prior to January 2, 1948. Only minutes beginning in 1948 have been reduced to writing since petitioner's incorporation. The internal revenue agent did not see the minute book during his investigation to determine the imposition of section 102 surtax.

Petitioner's minutes show that its directors, early in 1948, reviewed and approved plans and policies for expanding facilities, making provision for protection of petitioner's ‘interest’ in the St. Albans area, and the possible financing of installment sales of automobiles. They concluded that the accumulated surplus was needed by petitioner in its business. The minutes further show that late in 1948, the directors met, reviewed, and reapproved the same aspects of petitioner's plans.

Petitioner was not availed of during 1947 and 1948 for the purpose of preventing surtax on its sole stockholder by permitting its earnings and profits to accumulate beyond the reasonable needs of its business instead of being distributed.

OPINION.

OPPER, Judge:

It is true that up to the end of 1948, the latest year before us, not a single dollar of taxable dividends had ever been declared by petitioner, although as of the end of that period a surplus of almost half a million dollars had been accumulated of which over half was in marketable securities unrelated to petitioner's business. It is likewise true that during this time loans were made by petitioner to its sole stockholder. This is some indication that under section 102 the purpose of the absence of dividends was to furnish funds to the stockholder while at the same time avoiding the imposition upon him of the high surtaxes which the record shows would have been due had petitioner's earnings been distributed to him as dividends. Helvering v. Nat. Grocery Co., 304 U. S. 282; Helvering v. Stock Yards Co., 318 U. S. 693.