U.S. Supreme Court HELVERING v. NATIONAL GROCERY CO., 304 U.S. 282 (1938)

[Page 304 U.S. 282, 289]

not prevent its being valid, as the tax was otherwise permissible under the Constitution. Compare Helvering v. Mitchell, 303 U.S. 391, 58 S.Ct. 630.

3. It is said that section 104 is unconstitutional because the liability is laid upon the mere purpose to prevent imposition of the surtaxes, not upon the accomplishment of that purpose; and that, thus, it is a direct tax on the state of mind. But this is not so. The tax is laid 'upon the net income of such corporation.' The existence of the defined purpose is a condition precedent to the imposition of the tax liability, but this does not prevent it from being a true income tax within the meaning of the Sixteenth Amendment. The instances are many in which purpose or state of mind determines the incidence of an income tax. [Footnote 5]

[Page 304 U.S. 282, 291]

because there were no 'gains and profits' within the tax year. Conceding that net income of $863,787.22 was earned,6 it asserts that there were 'no gains and profits' because the depreciation in the securities owned, none of which were sold, exceeded $2,000,000. The argument is that the word 'gains' was not used as synonymous with 'profits', but to express contemplated unrealized increases or accession in net worth of the assets; and that assessability under section 104 depends not upon gains or profits- but upon the aggregate of gains (or losses) and profits, since prudent directors would take these into consideration in determining whether a dividend should be declared. Depreciation in any of the assets is evidence to be considered by the Commissioner and the Board in determining the issue of fact whether the accumulation of profits was in excess of the reasonable needs of the business. But obviously depreciation in the market value of securities which the corporation continues to hold does not, as matter of law, preclude a finding that the accumulation of the year's profits was in excess of the reasonable needs of the business.

Third. There was ample evidence to support the findings of the Board of Tax Appeals. The corporation held on January 31, 1930, bonds and stocks valued at $2,779,718.07; on January 31, 1931 it held $2,989,452.74-an increase of $209,734.67. The list of these bonds and stocks showed that they were in no way related to a grocery business. [Footnote 7] That there was no need of accumu-

[Page 304 U.S. 282, 292]

lating any part of the year's earnings for the purpose of financing the business was shown by the balance sheet. Comparing the cash on hand with the outstanding indebtedness it appears that the $1,332,332.28 cash on hand January 31, 1930 exceeded the $1,161,121.96 accounts payable, notes and mortgage, by $171,210.32. On January 31, 1931, the excess of cash over accounts payable was $1,136,820.55. These were then only $269,140.49; and the cash on hand was $1,405,961.04. The notes payable and the mortgage had been discharged.

That the purpose of accumulating this huge surplus was to escape the imposition upon Kohl of surtaxes, was indicated by the following facts. The $4,395,413.78 aggregate of bonds, stocks, and excess cash January 31, 1931, represents about four-fifths of the total accumulation of the surplus profits during the last ten years, which amounted to $5,742,455.35. 8 If the surplus profits of the fiscal year 1930-1931 had been distributed as dividends, the additional surtaxes payable thereon by Kohl in the year 1931 would have been at least $90,744.56, and for the preceding nine years would have aggregated $1,240,852.30.9

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petitioner, but entirely accord with a desire to get the equivalent of his dividends under another guise.' [Footnote 10]

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296 U.S. 300, 306, 56 S.Ct. 197, 200; Elmhurst Cemetery Co. v. Commissioner, 300 U.S. 37, 40, 57 S.Ct. 324, 325.

Fifth. The court expressed the opinion that the Board failed to consider relevant and controlling facts, that it relied upon improper evidence in reaching its conclusion, and that it failed to make the findings required by the statute. There is nothing in the record to justify that view. The findings quoted above are specific. The Board was not obliged to accept as true Kohl's statement of his intention and purposes; or to accept as sound the opinion of his experts. It was error to reverse the decision of the Board. There is no occasion to remand the case to it for further consideration.

REVERSED.

Mr. Justice McREYNOLDS, and Mr. Justice BUTLER are of opinion that the judgment below should be affirmed.

Mr. Justice CARDOZO and Mr. Justice REED took no part in the consideration or decision of this case. Footnotes

[Footnote *] Rehearing denied 59 S.Ct. 56, 83 L.Ed. --.

Footnote 1 Mr. Mellott, who stated the views of the minority, said: 'This being a 'fact case', it is with some reluctance that I reach a conclusion at variance with that of the Member who heard the testimony of the witnesses and had the advantage of observing their manner and demeanor while testifying. ...'

Footnote 2 Citing United Business Corporation v. Commissioner, 2 Cir., 62 F.2d 754; A. D. Saenger, Inc., v. Commissioner, 5 Cir., 84 F.2d 23; Almours Securities, Inc., v. Commissioner, 5 Cir., 91 F.2d 427; Williams Inv. Co. v. United States, Ct.Cl., 3 F.Supp. 225. See, also, United States v. R. C. Tway Coal Co., 6 Cir., 75 F.2d 336; Keck Inv. Co. v. Commissioner, 9 Cir., 77 F.2d 244.

Footnote 3 It is not possible to calculate what Kohl's exact additional surtax liability would have been had he included the corporation's income for 1930-1931 in his personal return for 1931, since that return is not in evidence. A minimum figure, however, may be obtained. The corporation's 'net income', as defined in section 104, was $954,645.62. There must be deducted from this $103,654.47 for corporation income tax; and $100,000 was distributed as a dividend in 1931 and included in computing the tax paid by Kohl in that year. Even assuming that the remaining $750,991.15 would have constituted his entire net income for 1931, and that the maximum deduction of 15% of this amount for charitable contributions could have been taken, a surtax of $119,328.50 would have been due.

Footnote 4 The first statute which provided for taxation where corporate profits are accumulated for the purpose of preventing the imposition of surtaxes upon stockholders was the Tariff Act of 1913, section 2A, subd. 1, 38 Stat. 166. In that Act, in the Revenue Act of 1916, 3, 39 Stat. 758, and in the Revenue Act of 1918, 220, 40 Stat. 1072, the tax was laid upon the shareholder. In all later Revenue Acts, the tax is laid upon the corporation. 1921 Act, 220, 42 Stat. 247; 1924 Act, 220, 43 Stat. 277; 1926 Act, 220, 44 Stat. 34; 1928 Act, 104, 45 Stat. 814, 26 U.S.C.A. 104 note; 1932 Act, 104, 47 Stat. 195, 26 U.S.C.A. 104 note; 1934 Act , 102, 48 Stat. 702, 26 U.S.C.A. 104; 1936 Act, 102, 49 Stat. 1676, 26 U.S.C.A. 104 and note.

The Revenue Acts of 1918 and 1921, 218(e) and 218(d), 40 Stat. 1070, 42 Stat. 245, respectively, also taxed the shareholders of 'personal service corporations' like partners. Section 112(k) of the Revenue Act of 1932, 26 U.S.C.A. 112(i) and note, and section 112(i) of the Acts of 1934 and 1936, 26 U.S.C.A. 112(i), provide for the disregard of the corporate entity in certain cases where foreign corporations are used for the purpose of avoiding federal taxes. And section 201 of the Revenue Act of 1937, 50 Stat. 818, 26 U.S.C.A. 326 et seq., provides that the adjusted undistributed net income of foreign personal holding companies must be included in the gross income of their United States shareholders. Compare also Southern Pac. Co. v. Lowe, 47 U.S. 330, 336, 38 S.Ct. 540; Gulf Oil Corporation v. Lewellyn, , 39 S.Ct. 35; Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 97 A.L.R. 1355.

Footnote 5 For example, section 293(b) of the Revenue Act of 1928, 26 U.S.C.A . 293(b) and note, provides that if any part of a deficiency is due to 'fraud with intent to evade tax,' there shall be an 'addition to the tax' of 50% of the deficiency. Helvering v. Mitchell, 303 U.S. 391, 58 S.Ct. 630. Whether a payment received is compensation within section 22(a) or is a gift within section 22(b)(3), 26 U.S.C.A. 22(a), 22(b)(3) and notes, is largely a matter of intention. Compare Bogardus v. Commissioner, 302 U.S. 34, 45, 58 S.Ct. 61, 62. Similarly, the deductibility of losses under section 23(e), 26 U.S.C.A. 23 note, may depend upon whether the taxpayer's motive in entering into the transaction was primarily profit. Compare Heiner v. Tindle, , 48 S.Ct. 326; Stuart v. Commissioner, 1 Cir., 84 F.2d 368, 107 A.L.R. 438; Goldsborough v. Burnet, 4 Cir., 46 F.2d 432; Beaumont v. Helvering, 63 App.D.C. 387, 73 F.2d 110, 113; Dresser v. United States, Ct. Cl., 55 F.2d 499. And section 112(k) of the Revenue Act of 1932, 26 U.S.C. A. 112(i) and note, and section 112(i) of the Acts of 1934 and 1936, 26 U.S.C.A. 112(i), provides that a foreign corporation shall not be considered as a corporation for purposes of certain of the non-recognition provisions of that section unless 'it has been established to the satisfaction of the Commissioner that such exchange (or distribution) is not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes.'

Footnote 6 The corporation reported in its return an income of $863,471.67. This was increased by the Commissioner to $863,787.22, and is not now disputed.

Footnote 7 The stock held January 31, 1931, of the aggregate cost of $2,676, 061.47, consisted of issues of 147 different corporations. Of industrials there were 61. Of public utilities, 27. Of insurance companies, 18. Of investment trusts, 13. Of banks and trust companies, 28. There were, besides, government, municipal, railroad, public utility, industrial and miscellaneous bonds which cost $313,391.27.

Footnote 8 The profits for these years (after deducting federal corporation income taxes paid) are listed in note 9, infra.

Footnote 9 Kohl's individual returns were made on a calendar year cash basis. For the fisal year here in question, January 31, 1930 to January 31, 1931, the corporation's books showed a profit of.$682,850.38 after deducting Kohl's salary and the 12% corporation income tax paid. A dividend of $100, 000 was paid in 1931. Had the remaining $582,850.38 been entirely distributed in that year, Kohl would have incurred an additional surtax liability of $90,744.56, even if it be assumed that the additional distribution would have constituted his entire net income for that year and that the 15% maximum charitable contributions deduction could have been taken. (It is impossible to calculate what his exact surtax liability for 1931 would have been, inasmuch as his personal return for that year is not in evidence.) Compare note 3, supra.

If the corporation had distributed its profits for each fiscal year immediately after its close on January 31, Kohl's additional surtax liability for the nine preceding years would have been as follows:

Book Profits of Fiscal Year in Corporation Which Less Federal Distribution Was Corporation Earned by Income Tax Year Corporation Paid 1930 Jan. 31, 1929-Jan. 31, 1930.. $713,181.62 1929 Jan. 31, 1928-Jan. 31, 1929.. 769,945.96 1928 Jan. 31, 1927-Jan. 31, 1928.. 707,239.60 1927 Jan. 31, 1926-Jan. 31, 1927.. 498,879.08 1926 Jan. 31, 1925-Jan. 31, 1926.. 508,837.06 1925 Jan. 31, 1924-Jan. 31, 1925.. 528,022.34 1924 Jan. 31, 1923-Jan. 31, 1924.. 547,483.80 1923 Jan. 31, 1922-Jan. 31, 1923.. 461,106.88 1922 Jan. 31, 1921-Jan. 31, 1922.. 324,908,63

Footnote 10 Compare A. D. Saenger, Inc., v. Commissioner, 5 Cir., 84 F.2d 23; United States v. R. C. Tway Coal Co., 6 Cir., 75 F.2d 336, 340.

Footnote 11 In the ten years the number of stores in the chain had been increased from 358 to 815. Even on Kohl's own estimate that 'including everything you have to have about $5000 per store,' this expansion could account for only $2,285,000 of the $5,742,455.35 of profits accumulated over that period.

Footnote 12 The Revenue Act of 1918, 40 Stat. 1057, which was not enacted until February 24, 1919, imposed a surtax of as much as 65% on income in excess of $1,000,000. The maximum rate under the Revenue Act of 1916, 39 Stat. 756, was only 13% on income in excess of $2,000,000.