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National Grocery Co. v. Helvering

October 21, 1937

NATIONAL GROCERY CO.
v.
HELVERING, COMMISSIONER OF INTERNAL REVENUE



Petition for Review from the United States Board of Tax Appeals.

Author: Buffington

Before BUFFINGTON and BIGGS, Circuit Judges, and DICKINSON, District Judge.

BUFFINGTON, Circuit Judge.

This case concerns the compulsory distribution and penalizing of corporate profits accumulated in excess of reasonable reserves and with intent to avoid surtax tax ation. The statutory authority to impose the taxes rests on the Revenue Act of 1928, c. 852, 45 Stat. 791. Eight members of the Tax Board united in an opinion imposing the tax here involved, while seven others united in a dissenting opinion.

Turning first to the above-cited act, we note it provides:

"Sec. 104. Accumulation of Surplus to Evade Surtaxes.

"(a) If any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section 13 and shall be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax.

"(b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax." 26 U.S.C.A. ยง 104 note.

Since the taxpayer corporation in this case was created some years before the statute was enacted, it will be seen the warrant for imposing the tax and penalty is, first, that such antecedent corporation was, after the act was passed, "availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed," and, secondly, that the fact "that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax."

The taxes here involved are for the year 1930, and from the above-quoted terms of the law it is clear that Congress did not force the distribution with penalization of all corporate profits but only where the profits "are permitted to accumulate beyond the reasonable needs of the business." Such being the conditions warranting taxation, it follows that the basic question is whether the profits here involved were accumulated beyond the reasonable needs of its business. If this basic fact is established, then, and then only, is such accumulation by the statute made "prima facie evidence of a purpose to escape the surtax."

Turning now to the facts of this case, we note the government called no witnesses and the proofs of the taxpayer were not contradicted. The case is clear of fraud or proof that the corporation was actuated by any purpose "of preventing the imposition of the tax upon its shareholders."

The uncontradicted proofs show that Henry Kohl, a foreigner, came to America in 1887 and was without money or property. He worked as a clerk in grocery stores for three years. By that time he had saved $217, and in 1891 became half owner in a $500 store and later on in a $250 additional one. Subsequently the partnership was ended by each partner taking one store. Thereafter Kohl bought two additional stores and was the first to use trading stamps in grocery stores. He drew nothing from his business save a bare living. In 1906 he incorporated his three stores under the name "Henry Kohl Company" and did business until 1911. The interesting story of the development of his business is best told in his own words.

The proofs show that dividends were declared in 1933, 1934, 1935, and 1936. None was declared in 1930, the taxable year here in question. The company accumulated bonds and stocks aggregating $2,989,452.74, which at the end of that taxable year had shrunk by more than $943,517.42. As bearing on the question of avoiding taxation, it will be noted the company was in a position, if it sought to escape taxation, to have sold these securities and established a deductible loss. In that regard Kohl testified: "I did not refrain from paying dividends in the National Grocery Company in 1930 in order to avoid the payment of any government tax. I have never done that." Bearing on the corporation acquiring and holding some $2,900,000 of securities, in answer to the question, "Why did the corporation make investments in all these different kinds of stocks and bonds?" the witness testified, and as we have seen without contradiction, as follows: "To invest that money so that when we would need it we would have it. All corporations do that more or less. * * * We wanted to use it all the time. It was invested because we wanted to have the cash on hand. And those were the days there was very little investment. We had to have the money ready. What will you do with it if you don't invest it? * * * It was part of our business. We carried that money, of course, principally to have the money on hand and get something for it. At the banks you would only get 2 per cent at that time. Of course, you don't get anything now. So we bought some stocks and bonds which we could turn over. You know, you can turn that stuff over in the morning, in a couple of hours, and you have your money if you want it. The money was invested that way so that whenever we needed the money we could sell the securities and get the money. All corporations do that." The proofs make it clear that Kohl was, so to speak, obsessed with the idea of store acquisition and this was the keynote of his actions and business life. To use a homely phrase, his plan was to acquire more stores by "plowing back" into his expanding business the profits his company made. Had he followed this course as an individual businessman, instead of doing so as the sole owner of the stock of his corporation, such a course would not have subjected him to this tax. That the growth of this great business was the dominant purpose of all he did is proven by the -- again uncontradicted -- proof of the treasurer of the company who had worked with him for nearly forty years:

"It has been Mr. Kohl's policy from the formation of the business that he could make more money by reinvesting the earnings in the business than in any other type of investment. The reason the National Grocery Company invested money in a diversified list of stocks and bonds, was because the cash was always available when it was invested in that type of securities and meanwhile was earning money. The Company has never been financed or expanded through borrowed money. We have never borrowed money except on short term borrowings. The Company ...


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