Memorandum Findings of Fact and Opinion
OPPER, Judge: This proceeding is before us on mandate from the United States Court of Appeals for the First Circuit issued pursuant to the Court's opinion in Young Motor Company v. Commissioner, 281 F. 2d 488 (C.A. 1, 1960), reversing 32 T.C. 1336 (1959). We there held that the petitioner had not borne the burden of proving error in respondent's determination that it was availed of to prevent the imposition of surtax on its stockholders by permitting earnings to accumulate instead of being distributed as dividends and was, therefore, subject to section 102 (I.R.C. 1939) surtax for the calendar years 1950, 1951, and 1952.
The appellate court has instructed us to determine more precisely the "actuating" motive for the accumulation. The Court said:
* * * The ultimate question is not whether the accumulation could be justified as a reasonable business decision, but whether taxpayer's actual dominant purpose was that defined in section 102(a). This is for the trier of facts.
Young Motor Company v. Commissioner, supra, 281 F. 2d at 491-492.
In order to afford the parties an opportunity to present additional evidence bearing on the questions raised in the opinion of the appellate court, a further hearing was held. Based on the record as a whole and in addition to the evidentiary facts previously found (32 T.C. 1336-1343), which we now reiterate, we make the following:
Supplemental Findings of Fact
Petitioner's accumulation of earnings and profits during the taxable years 1950, 1951, and 1952 was not in excess of the reasonable needs of the business.
Petitioner's directors never took any action in regard to, nor did they even discuss at any time, the declaration of a dividend on petitioner's stock.
Petitioner's president and principal stockholder, Harry W. Young, did not know of the section 102 surtax on undistributed corporate earnings until he was told of it by an examining revenue agent in 1953.
Young testified at the earlier hearing, and we so found in our original findings, that he leased certain real estate to petitioner at rentals amounting to $350 or $375 per month in 1950, which were increased to $750 per month in 1951 or 1952. At the hearing on remand, Young testified that these gross rentals amounted to $9,600 in 1950 and $12,000 in 1951 and 1952. The original finding is revised accordingly.
The last paragraph of our previous findings of fact, reading, "Petitioner was availed of during 1950, 1951 and 1952 to prevent the imposition of the surtax upon its share holders by permitting earnings or profits to accumulate instead of being distributed," is stricken.
Opinion
We have made a finding that the accumulations during the years in question were not beyond the reasonable needs of the business. This is based not on petitioner's affirmative evidence but on our conclusion that under the statute 1 the burden of proof was placed 2 on respondent, and that since the evidence is in virtual equipoise, the respondent has not sustained that burden. Nathan Cohen, 7 T.C. 1002 (1946).
We came to our previous conclusion while "[assuming] in its [petitioner's] favor that the evidentiary 3 element of business need has not been rebutted by respondent because of the statement furnished by petitioner" under section 534 of the 1954 Code. We made this as an assumption rather than a finding because of an effort to comply with the judicial principle of avoiding dicta and not deciding questions which, however disposed of, would not change the result. But we now find the fact affirmatively to avoid all ambiguity.
It is true that there was no plan for accumulating any amount for the purpose for which it was finally expended, Barrow Manufacturing Company v. Commissioner, 294 F. 2d 79 (C.A. 5, 1961); cf. Breitfeller Sales, Inc., 28 T.C. 1164 (1957), that the alleged concept existing in 1950-1952 was abandoned in 1954, and that the directors never considered the question nor made any determination in advance as to the amount or purpose for which the accumulations would be required. See Smoot Sand & Gravel Corporation v. Commissioner, 274 F. 2d 495 (C.A. 4, 1960), affirming a Memorandum Opinion of this Court, certiorari denied 362 U.S. 976 (1960), rehearing denied 363 U.S. 832 (1960). It is also true that section 537 of the 1954 Code, relied on by petitioner, 4 is not made applicable to the years before us, and even if it were, "[it] would not apply where the future plans are vague and indefinite, or where execution of the plans is postponed indefinitely." S. Rept. No. 1622, 83rd Cong., 2d Sess., p. 69 (1954). But with the burden placed where it is, we have given petitioner the benefit of all doubts and conclude that these considerations are not sufficient to overcome the statutory presumption in petitioner's favor in this limited area of the controversy.
The language in our original opinion may have been less precise than was warranted when we said that the provisions respecting the presumption 5 as to "reasonable needs" had merely become neutral. This was not intended to mean that the reasonable needs of the business or the relation of accumulations thereto were not to be examined, or that they were not actually considered, in the ultimate determination at which the statute is directed; namely, whether the purpose of the failure to distribute was that of avoiding tax on the shareholders. All that was meant was that, there being no accumulations beyond the reasonable needs of the business, the presumption in respondent's favor ceased to exist and that subsection then became neutral, or perhaps more precisely stated, inoperative. 6 We considered that the presumption with respect to reasonable needs is not like that in other provisions, such as the one covering contemplation of death where the statute expressly calls for the presumption to be applied in both directions; 7 and that, as far as section 102(b) of the 1939 Code is concerned, the presumption would take effect only in respondent's favor, see Chicago Stock Yards Co. v. Commissioner, 129 F. 2d 937 (C.A. 1, 1942), reversed sub nom. Helvering v. Stock Yards Co., 318 U.S. 693 (1943), and then only if the accumulations were beyond the reasonable needs of the business. We thought that there would then be no presumption in favor of either respondent or petitioner arising from this aspect of the record.
Petitioner construes respondent's determination - as do we - as being composed of "two findings of fact: (1) an unreasonable accumulation; (2) the prohibited purpose." We viewed the deficiency as hence being based "in part on the allegation that * * * any part of the earnings and profits have been permitted to accumulate beyond the reasonable needs of the business." 8 As to that "allegation," 9 we have made the dispositive finding. But needs of the business and their relation to the size of the accumulations were also considered in our original determination, and have again been considered here as a factor dealing with the remaining, or ultimate, issue. That ultimate issue, and the only one upon which final judgment can be rested, is the purpose for which the corporate earnings were accumulated. 10
We have found, for the reasons stated, that the accumulations were not "beyond the reasonable needs of the business." This is the statutory language. We have not found that the earnings were accumulated "for" the reasonable needs of the business, as petitioner requests us to do. That expression of causation, relevant as it might be to indicate an existing and possibly dominant purpose inconsistent with that proscribed by section 102, is one which, on this record, we cannot conscientiously make. We have found as a fact, based on his testimony, that Young, petitioner's president and principal stockholder, was unaware of the provisions of section 102. But this seems to us totally irrelevant. We have no doubt, and there is nowhere any evidence denying, that he was well aware of the individual income tax, of the effect on the tax due if dividends were declared, and of the consequent tax advantage to himself and his wife of not causing petitioner to declare any. 11 When he was asked whether a distribution to him would not have accomplished the purpose of conserving the business assets as well as the failure to distribute, his answer was, in effect, that had the earnings been distributed he would have felt free to spend them, with the result that in later years the assets would not have been available for further use. 12 We have affirmatively refrained from making any finding that this was, in fact, the reason for petitioner's action or for the participation of petitioner's principal stockholder therein.
The explanation advanced in petitioner's brief 13 is that had the earnings been distributed and had the individual income tax thereon been paid, there would then have been a smaller net sum available to petitioner's stockholders by means of which any future financing could have been accomplished.
In view of the conclusion we reach by reason of our interpretation of the present mandate, it is unnecessary to speculate as to what would have been the consequence had petitioner's controlling stockholders secured the benefit of the distribution of its earnings by way of dividends. We do not understand the Court to say, however, by that part of its opinion, 14 that the imposition of the income tax upon the stockholders, with its consequent diminution of their resources, would by itself, and without more, be adequate to justify the accumulation of earnings by a corporation in order to avoid the imposition of the section 102 tax. As we said in Latchis Theatres of Keene, Inc., 19 T.C. 1054, 1065 (1953), affd. 214 F. 2d 834 (C.A. 1, 1954):
* * * The only disadvantage that this record shows in such a procedure [distributing the earnings of the petitioners to their stockholders so that those individuals could use the funds] is that it would have subjected the stockholders to additional taxes, the very result which section 102 was designed to promote. Helvering v. Chicago Stock Yards Co., 318 U.S. 693.
Young testified that the reason for the accumulations was to provide the business with funds for anticipated use in petitioner's operations. But we have in other cases viewed this type of testimony against the background of all the surrounding circumstances, and as we said 15 in Pelton Steel Casting Co., 28 T.C. 153, 173-174 (1957), affd. 251 F. 2d 278 (C.A. 7, 1958), certiorari denied 356 U.S. 958 (1958):
* * * Of course, the corporation's intent will be considered to be that of those responsible for its acts. * * * In this regard, while the testimony of petitioner's officers and shareholders is entitled to some weight, the issue is to be resolved in the light of all of the surrounding circumstances, including, of course, the interests of those in control, and their actual conduct.
While we have found that the accumulations were not beyond the reasonable needs of the business for the reasons already set forth, it seems to us not inappropriate, in determining the purpose of the accumulation, to take into consideration what was actually done with the earnings that were not distributed. These were not retained in the business, nor, for the most part, used by it to make investments which would readily produce cash if needed and return at least some income to petitioner in the meantime. The bulk of the earings was used for making loans to Young and his unrelated business enterprises without interest and with no evidence in this record that they could have been converted into cash when and if petitioner's need for funds should arise. 16 The reasonable needs of petitioner's business might hence have equalled the amount of its earnings which were not distributed, but there is no showing that these business needs were met by the manner in which petitioner treated the accumulation, nor that they were the reason for it.
In our prior opinion we took the position that while respondent had not borne the burden of proving that petitioner's accumulation of earnings was not in excess of the reasonable needs of the business, petitioner had likewise failed to produce proof to overcome the presumptive correctness of the Commissioner's determination that the purpose of failure to distribute the earnings was to avoid surtax on the shareholders. It is to this latter aspect of the case that the appellate court's mandate is directed. As we construe the Court's opinion on mandate it rejects what might be termed the dual burden of proof concept on which our opinion was grounded; that is, that prima facie correctness attaches, independently, both to the Commissioner's determination that the accumulation was in excess of the reasonable needs of the business and that it was for the purpose of avoiding surtax on the shareholders. On this point, we relied chiefly on Pelton Steel Casting Co., supra.
We read the opinion on remand, although it is not entirely clear on this point, as directing us, once there has been a shift to the Commissioner of the burden of proof with respect to the reasonableness of the accumulation, to regard the burden of proof with respect to the purpose of the accumulation as likewise having shifted to him. The Court in a footnote expressed disagreement with the Pelton Steel case to the extent that it "supports the present reasoning of the Tax Court."
On the general subject of petitioner's purpose for failing to distribute, we said (at 1344):
* * * The statute also calls for the existence of the inhibited purpose.
If this purpose exists it may be accompanied by other legitimate business objectives and still the statute will apply. * * * [We] think, on the present record * * * that petitioner has failed to carry its burden of showing that one of the purposes of maintaining its relatively large corporate surplus was not to prevent the imposition of surtax upon Young and his wife by means of accumulating its earnings.
In stating this general principle we relied upon cases previously decided, including an opinion of the Court of Appeals for the First Circuit, even though that was reversed in respondent's favor in one of the authorities cited. In the First Circuit's opinion in Chicago Stock Yards Co. v. Commissioner, supra, 129 F. 2d at 947-948, Judge Magruder stated the test to be as follows:
* * * It has been held that the tax under § 104 [Revenue Act of 1928, the predecessor of section 102 of the 1939 Code] cannot be avoided unless the corporation succeeds in establishing that the purpose of the accumulation was "wholly other than that of preventing surtax upon its shareholders - not only that there was another purpose, but that there was a complete absence of the disapproved purpose." * * * Perhaps this is too strong a statement; but at least it is clear that § 104 would apply if in the totality of reasons which induced the continuing of the accumulation the forbidden motive of surtax avoidance played a substantial part.
Since the Revenue Act of 1928, as to which this statement was made of the test applicable to excessive accumulations, the provision has been re-enacted something like five times without material change in the language dealing with "purpose." 17
But the law of this case now is that our statement of the criteria was in error. The Court of Appeals, in reviewing the present case, states (at 491):
The Tax Court may have been led into this error by a misconception of the precise issue. In its opinion it referred to preventing the imposition of the surtax upon stockholders as "one" of taxpayer's purposes, and stated, "If this purpose exists it may be accompanied by other legitimate business objectives and still the statute will apply." * * * The statute does not say "a" purpose, but "the" purpose. The issue is * * * what was the primary or dominant purpose which led to the decision. Cf. Commissioner of Internal Revenue v. Duberstein, 1960, 363 U.S. 278 * * *. The Tax Court's test was altogether too favorable to the government.
Placing the burden of proof of "purpose" upon respondent, as we now do by reason of the law of the case as stated in the opinion on review, and for the same reason defining that "purpose" as being required to be the dominant one, we conclude that respondent has not carried his burden here by a preponderance of the evidence; and for that reason and without reaching any conclusion which will be binding in the future in other cases, we find, accordingly, as an ultimate fact, that petitioner was not formed or availed of in the years before us for the dominant purpose of preventing the imposition of the surtax upon its shareholders or the shareholders of any other corporation through the medium of permitting earnings or profits to accumulate instead of being divided or distributed.
Decision will be entered for the petitioner.