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Moline Properties v. Comm'r

U.S.
Jun 1, 1943
319 U.S. 436 (1943)

Summary

holding that a corporation may be a separate taxable entity even if it has only one shareholder who exercises total control over its affairs

Summary of this case from George v. C.I.R

Opinion

CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE FIFTH CIRCUIT.

No. 660.

Argued April 16, 19, 1943. Decided June 1, 1943.

1. Upon the facts of this case, held that, for the purpose of the federal income tax, gains from sales (in 1935 and 1936) by a corporation of its property, although the corporation was owned wholly by an individual stockholder, could not be treated as income taxable to the individual rather than to the corporation. P. 440. 2. The corporation in this case was not a mere agent of the stockholder. P. 440. 131 F.2d 388, affirmed.

CERTIORARI, 318 U.S. 751, to review the reversal of a decision of the Board of Tax Appeals, 45 B.T.A. 647, that there were no deficiencies in the corporate taxpayer's income and excess-profits taxes.

Mr. Nelson Trottman, with whom Messrs. Bart A. Riley and Thomas H. Anderson were on the brief, for petitioner.

Mr. J. Louis Monarch, with whom Solicitor General Fahy, Assistant Attorney General Samuel O. Clark, Jr., and Mr. Sewall Key were on the brief, for respondent.


Petitioner seeks to have the gain on sales of its real property treated as the gain of its sole stockholder and its corporate existence ignored as merely fictitious. Certiorari was granted because of the volume of similar litigation in the lower courts and because of alleged conflict of the decision below with other circuit court decisions.

112 West 59th Street Corp. v. Helvering, 62 App.D.C. 350, 68 F.2d 397; United States v. Brager Building Land Corp., 124 F.2d 349; North Jersey Title Ins. Co. v. Commissioner, 84 F.2d 898; Inland Development Co. v. Commissioner, 120 F.2d 986; see Carling Holding Co. v. Commissioner, 41 B.T.A. 493; Mayer v. Commissioner, 36 B.T.A. 117; Abrams Sons' Realty Corp. v. Commissioner, 40 B.T.A. 653; Thrift Realty Co. v. Commissioner, 29 B.T.A. 545; Moro Realty Holding Corp. v. Commissioner, 25 B.T.A. 1135, affirmed 65 F.2d 1013; Forshay v. Commissioner, 20 B.T.A. 537.

Petitioner was organized by Uly O. Thompson in 1928 to be used as a security device in connection with certain Florida realty owned by him. The mortgagee of the property suggested the arrangement, under which Mr. Thompson conveyed the property to petitioner, which assumed the outstanding mortgages on the property, receiving in return all but the qualifying shares of stock, which he in turn transferred to a voting trustee appointed by the creditor. The stock was to be held as security for an additional loan to Mr. Thompson to be used to pay back taxes on the property. Thompson owned other real property, title to which he held individually. In 1933 the loan which occasioned the creation of petitioner was repaid and the mortgages were refinanced with a different mortgagee; control of petitioner reverted to Mr. Thompson. The new mortgage debt was paid in 1936 by means of a sale of a portion of the property held by petitioner. The remaining holdings of the petitioner were sold in three parcels, one each in 1934, 1935 and 1936, the proceeds being received by Mr. Thompson and deposited in his bank account.

Until 1933 the business done by the corporation consisted of the assumption of a certain obligation of Thompson to the original creditor, the defense of certain condemnation proceedings and the institution of a suit to remove restrictions imposed on the property by a prior deed. The expenses of this suit were paid by Thompson. In 1934 a portion of the property was leased for use as a parking lot for a rental of $1,000. Petitioner has transacted no business since the sale of its last holdings in 1936 but has not been dissolved. It kept no books and maintained no bank account during its existence and owned no other assets than as described. The sales made in 1934 and 1935 were reported in petitioner's income tax returns, a small loss being reported for the earlier year and a gain of over $5,000 being reported for 1935. Subsequently, on advice of his auditor, Thompson filed a claim for refund on petitioner's behalf for 1935 and sought to report the 1935 gain as his individual return. He reported the gain on the 1936 sale.

The question is whether the gain realized on the 1935 and 1936 sales shall be treated as income taxable to petitioner, as the Government urges, or as Thompson's income. The Board of Tax Appeals held for petitioner on the ground that because of its limited purpose, the corporation "was a mere figmentary agent which should be disregarded in the assessment of taxes." Moline Properties v. Commissioner, 45 B.T.A. 647. The Circuit Court of Appeals reversed on the ground that the corporate entity, chosen by Thompson for reasons sufficient to him, must now be recognized in the taxation of the income of the corporation. Commissioner v. Moline Properties, 131 F.2d 388.

The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity. New Colonial Co. v. Helvering, 292 U.S. 435, 442; Deputy v. du Pont, 308 U.S. 488, 494. In Burnet v. Commonwealth Improvement Co., 287 U.S. 415, this Court appraised the relation between a corporation and its sole stockholder and held taxable to the corporation a profit on a sale to its stockholder. This was because the taxpayer had adopted the corporate form for purposes of his own. The choice of the advantages of incorporation to do business, it was held, required the acceptance of the tax disadvantages.

Texas-Empire Pipe Line Co. v. Commissioner, 127 F.2d 220. Cf. Edwards v. Chile Copper Co., 270 U.S. 452, 453-4, 456.

Sheldon Bldg. Corp. v. Commissioner, 118 F.2d 835.

Palcar Real Estate Co. v. Commissioner, 131 F.2d 210.

Watson v. Commissioner, 124 F.2d 437; Salmon v. Commissioner, 126 F.2d 203.

To this rule there are recognized exceptions. Southern Pacific Co. v. Lowe, 247 U.S. 330, and Gulf Oil Corp. v. Lewellyn, 248 U.S. 71, have been recognized as such exceptions but held to lay down no rule for tax purposes. New Colonial Co. v. Helvering, supra, 442, n. 5; Burnet v. Commonwealth Improvement Co., supra, 419, 420. A particular legislative purpose, such as the development of the merchant marine, whatever the corporate device for ownership, may call for the disregarding of the separate entity, Munson S.S. Line v. Commissioner, 77 F.2d 849, as may the necessity of striking down frauds on the tax statute, Continental Oil Co. v. Jones, 113 F.2d 557. In general, in matters relating to the revenue, the corporate form may be disregarded where it is a sham or unreal. In such situations the form is a bald and mischievous fiction. Higgins v. Smith, 308 U.S. 473, 477-78; Gregory v. Helvering, 293 U.S. 465.

The petitioner corporation was created by Thompson for his advantage and had a special function from its inception. At that time it was clearly not Thompson's alter ego and his exercise of control over it was negligible. It was then as much a separate entity as if its stock had been transferred outright to third persons. The argument is made by petitioner that the force of the rule requiring its separate treatment is avoided by the fact that Thompson was coerced into creating petitioner and was completely subservient to the creditors. But this merely serves to emphasize petitioner's separate existence. New Colonial Co. v. Helvering, supra, 441. Business necessity, i.e., pressure from creditors, made petitioner's creation advantageous to Thompson.

When petitioner discharged its mortgages held by the initial creditor and Thompson came in control in 1933, it was not dissolved, but continued its existence, ready again to serve his business interests. It again mortgaged its property, discharged that new mortgage, sold portions of its property in 1934 and 1935 and filed income tax returns showing these transactions. In 1934 petitioner engaged in an unambiguous business venture of its own — it leased a part of its property as a parking lot, receiving a substantial rental. The facts, it seems to us, compel the conclusion that the taxpayer had a tax identity distinct from its stockholder.

Petitioner advances what we think is basically the same argument of identity in a different form. It urges that it is a mere agent for its sole stockholder and "therefore the same tax consequences follow as in the case of any corporate agent or fiduciary." There was no actual contract of agency, nor the usual incidents of an agency relationship. Surely the mere fact of the existence of a corporation with one or several stockholders, regardless of the corporation's business activities, does not make the corporation the agent of its stockholders. Therefore the question of agency or not depends upon the same legal issues as does the question of identity previously discussed. Burnet v. Commonwealth Improvement Co., supra, 418, 419-20.

Affirmed.


Summaries of

Moline Properties v. Comm'r

U.S.
Jun 1, 1943
319 U.S. 436 (1943)

holding that a corporation may be a separate taxable entity even if it has only one shareholder who exercises total control over its affairs

Summary of this case from George v. C.I.R

holding that a sole shareholder may not sidestep the corporate “separateness” to gain a personal tax advantage

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holding "[t]he choice of the advantages of incorporation . . . require the acceptance of the tax disadvantages."

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holding that “the necessity of striking down frauds on the tax statute” may require disregarding the corporate form

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holding that separate tax identity existed where entity engaged in its own business ventures separate from its stockholder and in independent legal actions against third parties

Summary of this case from TD Banknorth, N.A. v. Department of Taxes

holding that "the necessity of striking down frauds on the tax statute" may require disregarding the corporate form

Summary of this case from Gore Enter. Holdings, Inc. v. Controller of the Treasury

recognizing the corporate form for tax purposes even where the corporation involved was completely dominated by its shareholder and appeared to lack beneficial ownership of its assets and income

Summary of this case from Barnhart Ranch, Co. v. Comm'r

noting that a corporation and its shareholders are distinct taxable entities

Summary of this case from Custom Chrome, Inc. v. C.I.R

defining separate taxable entities

Summary of this case from U.S. v. Wapnick

In Moline Properties v. Comm'r, 319 U.S. 436, 439, 63 S.Ct. 1132, 1134, 87 L.Ed. 1499 (1943), the Court held that a corporation must be recognized as a separate taxable entity if that corporation's purpose is the equivalent of a business activity or is followed by the carrying on of a business.

Summary of this case from Gulf Oil Corp. v. C.I.R

In Moline Properties v. Comm'r, 319 U.S. 436, 63 S.Ct. 1132, 87 L.Ed. 1499 (1943), the Supreme Court recognized business purpose is created for a legitimate business purpose is a taxable separately entity.

Summary of this case from Beech Aircraft Corp. v. United States

In Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 63 S.Ct. 1132, 87 L.Ed. 1499 (1943), the Court made clear that a taxpayer cannot establish a corporation for business purposes and then expect that it be ignored for federal tax purposes.

Summary of this case from Vaughn v. United States

In Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 63 S.Ct. 1132, 87 L.Ed. 1499 (1943), the Supreme Court considered and rejected such an argument advanced by an individual who had transferred property to a wholly-owned corporation at the insistence of his mortgagee.

Summary of this case from Moncrief v. United States

In Moline Properties, the Court stated, The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity.

Summary of this case from United States v. Creel

In Moline Properties, the question of purpose to evade or avoid income taxes (through the use of a corporation) was addressed as part of the theretofore live issue whether the corporation was a viable taxable entity or a sham.

Summary of this case from Foglesong v. C. I. R

In Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 63 S.Ct. 1132, 87 L.Ed. 1499 (1943), the Supreme Court held that the tax laws require taxation of the corporate entity if it engages in business activity.

Summary of this case from United States v. Scornavacco's Restaurant, Inc.

In Moline and National Carbide, the Supreme Court has established and reaffirmed a formula which goes the whole distance in attributing to a corporation, as its own for tax purposes, income, earnings, profits, and assets that are, according to state law, beneficially (legally and equitably) owned by others.

Summary of this case from Carver v. United States

In Moline, the taxpayer asked the Court to disregard its corporate existence and treat gains on the sale of its real estate as individual income to its sole shareholder.

Summary of this case from AEP COMPANY, INC. v. U.S.

In Moline, the taxpayer asked the Court to disregard its corporate existence and treat gains on the sale of its real estate as individual income to its sole shareholder.

Summary of this case from American Electric Power, Inc. v. U.S.

In Moline Properties, 319 U.S. at 436, the Supreme Court held that, except in very limited circumstances, a corporation should be regarded as a separate entity for tax purposes.

Summary of this case from In re E.C.J. Inv., Inc.

In Moline Properties, 319 U.S. at 440, the Supreme Court, in dicta, rejected the argument that a corporation acts as an agent for its shareholders in the absence of an actual agency agreement or other "usual incidents of an agency relationship."

Summary of this case from In re E.C.J. Inv., Inc.

In Moline Properties, an individual formed a wholly owned corporation to hold title to his real estate properties and assume the mortgages on those properties.

Summary of this case from In re E.C.J. Inv., Inc.

In Moline, an individual conveyed real property (apparently at the suggestion of a mortgage holder) to a corporation that the individual founded and owned.

Summary of this case from In re Leedy

In Moline, the Supreme Court considered whether the existence of a corporation should be ignored for purposes of determing whether income on the sale of real property should be taxed to a corporation or its sole shareholder.

Summary of this case from Roccaforte, Jr. v. Commissioner of Internal Revenue

In Moline Properties and National Carbide the controlled corporations were wholly owned by either one individual or by one corporation.

Summary of this case from Stillman v. Commissioner of Internal Revenue
Case details for

Moline Properties v. Comm'r

Case Details

Full title:MOLINE PROPERTIES, INC. v . COMMISSIONER OF INTERNAL REVENUE

Court:U.S.

Date published: Jun 1, 1943

Citations

319 U.S. 436 (1943)
63 S. Ct. 1132

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