Emery, Bird, Thayer Realty Co. v. United States

198 F. 242, 1 A.F.T.R. (P-H) 231, 1912 U.S. Dist. LEXIS 1292

• Court: District Court, W.D. Missouri
• Decided: July 27, 1912
• Docket: No. 3,821
• Status: Published

Opinion

VAN VALKENBURGH, District Judge

(after stating the facts as above.) Briefly recapitulated, the questions presented are these: First. Can the plaintiff bring suit to recover taxes, alleged to have been wrongfully assessed and collected under the Corporation Tax Law, directly against the United States under the Tucker Act, other requirements of law having been complied with, or is its remedy against the Collector of Internal Revenue by whom the assessment and collection were made? Second. The Emery, Bird, Thayer Dry Goods Company, a business corporation of Kansas City, Mo., originally was the owner of and was in possession of the real estate, leasehold interests, buildings, and improvements upon and in which its business was conducted. On or about February 1, 1908, 18 months before the passage of the Corporation Excise Tax Law, it was decided by its stockholders and officers to transfer these holdings to a corporation to be organized under the laws of the state of Missouri as the Emery, Bird, Thayer Realty Company, the plaintiff in this action. This corporation was organized for the specific purpose of holding such real estate and leasehold interests, buildings, and improvements and of leasing the same to the Emery, Bird, Thayer Dry Goods Company, and no other, for a long period, the latter company under the lease to have the entire management and assume all responsibilities respecting such properties. The stockholders of the plaintiff company were to be and are substantially identical with those of the Emery, Bird, Thayer Dry Goods Company; the only exceptions being members of the families of two of the officers of the Dry Goods Company. The Realty Company thus holding the title was to retain the single duty of collecting the rentals under .this lease, and pay the same as dividends to the stockholders. It also possesses under the lease the general' power to' enforce the terms of that lease and protect its title to the property. When the lease expires, if no renewal thereof is made, it may, upon a sufficient vote of the stockholders, dispose of the properties, and presumably distribute the proceeds to the stockholders. This would amount to a liquidation of the affairs,of the corporation, because no other powers to do business are granted by the charter. Under such circumstances, is it a corporation doing business within the meaning of the act of August 5, 1909, and subject to the excise tax therein provided? _ _ •

_ _

[1] 1. The first question is no longer an open one in this jurisdiction. The precise question was before the Court of Appeals for this circuit in Christie-Street Commission Co. v. United States, 136 Fed. 326, 69 C. C. A. 464. It vras there held:

“A claim to recover back internal revenue taxes illegally exacted under a misconstruction of the war revenue law of 1898 is a claim founded upon a law of Congress, within the meaning of the act of March 3, 1887, and it may he enforced by an action directly against the United States under that act, after it has been presented to the commissioner of internal revenue, whether it has received his approval or not, and whether it is an action on a contract or an action sounding in tort.”

In the opinion Judge Sanborn said:

“The acts of 1855 and 1887 here under consideration mark a rational and gratifying advance in civilization and public policy, and they should be liberally construed to accomplish the benign purpose of their enactment. The theory that a nation or its government should refuse to submit its controversies with its citizens to the adjudication of impartial tribunals is but the fast receding echo of the rule that the king can do no wrong. There are few more grievous wrongs than the denial by a nation of a hearing and trial of the just claims which its citizens may have against it. There is no reason why a government should not submit its controversies wdth its subjects to adjudication, or why it should not itself practice that justice whose administration is the great purpose of its existence. Justice demands, and a wise public policy requires, that nations should submit themselves to the judgments of impartial tribunals, to the enforcement of their contracts and to satisfaction of their wrongs as universally as individuals. The decisions of the Supreme Court upon the specific question before us evidence a constantly increasing tendency to adopt this view.”

All the decisions of the Supreme Court of the United States now urged by counsel for the government, which have any bearing upon the matter in dispute, were urged upon the attention of the Circuit Court of Appeals by the writer of this opinion, then counsel for the United States, and received full consideration. To seek a decision in conflict with the doctrine announced in Christie-Street Commission Co. v. United States, supra, is to ask this court to disregard the deliberate judgment- of a superior court of controlling authority. Apart from all other considerations, such a policy wouid lead to instability and endless confusion, and is indefensible from every point of view. Furthermore, the doctrine announced in that case commends itself to my judgment. I am unable to perceive either justice or advantage, in the procedure upon which the government insists.

[2, 3] 2. It remains to be considered whether the plaintiff is a corporation by a proper construction of the act made subject to pay annually a special excise tax. Section 38 provides:

“That every corporation * * * organized for profit and having a capital stock represented by shares * * * organized under the laws of the United States or of any state or territory of the United States * * * shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by such corporation, * * * equivalent to one per centum upon the entire net income over and above five thousand dollars received by it from all sources during such year.”

Subject to exceptions enumerated:

“Second. Such net income shall be ascertained by deducting from the gross amount of the income of such corporation, * * * received within the year from all sources, (first) all -the ordinary and necessary expenses actually paid within the year out of income in the maintenance and operation of its business and properties, including all charges such as rentals or franchise payments, required to be made as a condition to the continued use or possession of property.”

• This act has been exhaustively and minutely considered and construed by the Supreme Court of the United States in the cases of Flint v. Stone Tracy Co., 220 U. S. 107, 31 Sup. Ct. 342, 55 E. Ed. 389, Ann. Cas. 1912B, 1312, Eliot v. Freeman, 220 U. S. 178, 31 Sup. Ct. 360, 55 L. Ed. 424, and Zonne v. Minneapolis Syndicate, 220 U. S. 187, 31 Sup. Ct. 361, 55 L. Ed. 428. In the case first cited it was held that the tax is imposed upon the doing of business of the character described’; that it is business done in a corporate capacity which is the subject-matter of the tax imposed in the act under consideration; that the requirement to pay such taxes involves the exercise of the privilege, to wit, that of doing business in such corporate capacity; that, therefore, the element of absolute and unavoidable demand is lacking. If business is not done in the manner described in the statute, no tax is payable. Thomas v. United States, 192 U. S. 363, 24 Sup. Ct. 305, 48 L. Ed. 481. On page 171 of 220 U. S., on page 357 of 31 Sup. Ct., 55 L. Ed. 389, Ann. Cas. 1912B, 1312, it was said:

“We think it is clear that corporations organized for the purpose of doing business, and actually engaged in such activities as leasing property, collecting rents, managing office buildings, making investments of profits, or leasing ore lands and collecting royalties, managing wharves, dividing profits, and in some eases investing .the surplus, are engaged in business within the meaning of this statute, and in the capacity necessary to make such organizations subject to the law.”

We gather from this that the corporation subject to the tax must be organized for the purpose of doing business, and, in addition thereto, must be actually engaged in such activities. The case of Eliot v. Freeman involved joint-stock companies not organized under the laws of the state. For this reason, it was held that the law did not apply.

A more specific consideration of the act, as applied to a subject such as is now before us, is disclosed in the case of Zonne v. Minneapolis Syndicate. There the corporation, as was admitted by the pleadings, was originally organized for and engaged in the business of letting stores and offices in a building owned by it, and collecting and receiving rents therefor. Subsequently it demised and let all of the tracts belonging to it to three trustees for the term of 130 years, at an annual rental of $61,000, to be paid by said lessees to said corporation. At that time the corporation caused its articles of incorporation, which had theretofore been those of a corporation organized for profit, to be so amended as to show that the sole purpose of the corporation should be to hold the title to the property subject to the lease aforesaid, and, for the convenience of its stockholders, to receive, and to distribute among them, from time to time, the rentals that accrued under this lease, and the proceeds of any disposition of the land. Its sole function then was to collect the rents and distribute them as dividends to its stockholders, and ultimately to dispose of the property and distribute the proceeds. This is what is actually done by the plaintiff corporation in this case. Defendant contends that because its articles of incorporation, which were originally those of a corporation organized for profit, have not been amended, as was done in the Zonne Case, it necessarily remains a corporation organized for and engaged in business, and is therefore subject to the tax. In the Minneapolis Syndicate Case the court said:

“As we have construed the Corporation Tux Law (Flint v. Stone Tracy Co., supra, at page 107 of 220 U. S., at page 342 of 31 Sup. Ct., 55 L. Ed. 389. Ann. Cas. 1912B, 1312), it provides for an excise upon the carrying on or doing of business in a corporate capacity. * * * The corporation involved in the present case, as originally organized and owning and renting an office Building, was doing business within the meaning of the statute as we have construed it. Upon the record now' presented we are of opinion that the Minneapolis Syndicate, after the demise of the property and reorganization of the corporation, was not engaged in doing business within the meaning of the act. It had wholly parted with control and management of the property. Its sole authority was to hold the title subject to the lease for .130 years, to receive and distribute the rentals which might accrue under the terms of the lease, or the proceeds of any sale of the land if it should he sold. The corporation had practically gone out of business in connection with the property and had disqualified itself by the terms of reorganization from any activity in respect to it. We are of opinion that the corporation was not doing business in such wise as to make it subject to the tax imposed by the act of 1909.” Zonne v. Minneapolis Syndicate, supra, at pages 190, 191, of 220 U. S., at page 362 of 31 Sup. Ct., 55 L. Ed. 428.

The only difference between that case and the case at bar which could possibly militate to the disadvantage of the plaintiff herein is that here there has been no act of reorganization of the corporation by the terms of which it has disqualified itself from any activity in respect to the property. But by its lease it has done so as effectively as did the Minneapolis Syndicate. There the property was leased to trustees at a fixed sum and for a long period. In each case the lessor has wholly parted with the control and management of the property; provided, of course, the terms of the lease are observed. In the Minneapolis case the corporation was originally engaged in the business of letting stores and offices in a building owned by it, but indiscriminately to various tenants after the usual manner of renting such a property. Here, the corporation was specifically organized for the purpose merely of holding the title to the property, and of renting it to a specific tenant. I am of opinion that this does not disclose an organization for business purposes as contemplated by the act. True, the corporation was organized under the chapter relating to business and manufacturing corporations, but that is because this is the only chapter applicable to such a corporate existence. Its purposes may well satisfy the requirements of the Missouri statute, without bringing' them within the purview of the act of Congress. The power of ultimate sale and distribution of proceeds is alike in both cases, as is the express or implied power as title holder to enforce the provisions of • the lease.

I cannot believe that the act of reorganization and amendment of charter was controlling in the Zonne Case. It was present, and was recited as adding additional force to the construction there adopted. But, as we have seen, two things must concur to render a corporation subject to this tax. It must be organized for the purpose of doing business, and it must be actually engaged in that business. The Minneapolis Syndicate after the demise of the property to the trustees— a single tenant— was not engaged in doing business within the meaning of the act. It had wholly parted with control and management of the property. In this case the Realty Company was organized to do no more than this, and, in any event, it is not actively engaged in doing more. Under the terms of this charter reorganization is unnecessary, and, if effected, would only tend to emphasize a situation already existing. As stated by the learned district attorney in his brief, “plaintiff has arranged its matters in such a satisfactory and convenient manner as to relieve it during the period of this present lease from actively participating in the management of the property in question and from being annoyed with the usual inconveniences and problems that are involved in the management and control of property generally/’ It has, in fact, parted entirely with the management and control of this property during the life of the lease. Its charter gives it no power to acquire other property, nor to deal in property generally. It gives it no power to lease to any one but this single tenant, nor to engage in the business of leasing property generally. It gives it no power to operate upon the expiration of this lease, in default of a renewal, but simply to dispose of the property by sale and distribute the proceeds. And even though a corporation be deemed to have been organized for business purposes, if it abstains from doing business, it is not subject to the tax. This entire transaction was completed long prior to the enactment of this excise tax law. Its object was not to defraud the government of revenue. The Emery, Bird, Thayer Dry Goods Company, a corporation, pays excise taxes upon the net income of its business. The government is not defrauded of its revenue. The net income of the Dry Goods Company is entitled to credit for all the ordinary and necessary expenses actually paid within the year out of income in the maintenance and operation of its business and properties, including all charges such as rentals required to be made as a condition to the continued use or possession of property. If the title were held otherwise, the Dry Goods Company, which is the only active business corporation, would be entitled to such a deduction. This is evidently an arrangement merely for the sake of convenience in order that the capital of the dry goods corporation may not be withdrawn from its business operations and invested in lands, leasehold interests, and appurtenant buildings. The stockholders of the Dry Goods Company really own this property. For convenience they hold it through this corporate agency. The rental paid is the income or return upon this investment.

[4] Held in the names of the individuals, the property could not be directly taxed; held in the corporate name it is taxed, if at all, only by virtue of the form of its ownership. This cannot be done.

[5] Taxes on real estate being indisputably direct taxes, taxes on the rents or income of real estate are equally direct taxes. Pollock v. Farmers’ Loan & Trust Co., 157 U. S. 429, 15 Sup. Ct. 673, 39 L. Fd. 759; s. c., 158 U. S. 601, 15 Sup. Ct. 912, 39 L. Ed. 1108. The language in these opinions “was but a statement that a tax which was in itself direct, because imposed upon property solely by reason of its ownership, could not be changed by affixing to it the qualifications of excise duty.” Flint v. Stone Tracv Co., supra, at page 149 of 220 U. S., at page 348 of 31 Sup. Ct., 55 L. Ed. 389, Ann. Cas. 1912B, 1312.

I am unable to distinguish this case in principle from that of Zonne v. Minneapolis Syndicate, supra, and it follows that the finding and judgment-must be for the plaintiff.