Appendix — Bay Sound Transportation Co. v. United States

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SUPREME COURT. U. & “AUG 25 1969

"JOHN F. DAVIS, CLERK

wo _ 007"

IN THE

Supreme Cont af the Yorted States

October Term, 1909

BAY SOUND TRANSPORTATION CO., et al.,

Petitioners

| | moe, |

ween UNITED STATES OF AMERICA, Respondent

‘ADDENDUM TO

PETITION FOR WRIT OF CERTIORARI

To The United States Court Of Appeals

For The Fifth Circuit

> | ‘Opinions of United States Court of Appeals for the

Fifth Circuit and United States District Court

'(S.D. Tex.) aa

aoe - JOHN A. BAILEY

— | , SUSMAN & BAILEY |

- 1721 Chamber of Commerce

Building

Houston, Texas 7 7002

Attorney for Petitioners

Alpha Low Brief Co, M&M Bldg., Houston, Texas 77002

INDEX

Opinion of United States Court of Appeals for the

Fifth Circuit

| J udgment of United States Kis of Appeals for

the Fifth Circuit:

Sher ae ee! gx CoE ge sat ky oh ar Lh cpt ae

: Order of United States Court of Appeals = the

Fifth Circuit Overruling Petition for Réhearing

Opinion of United States District Court for the .

Southern District of Texas ..

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/ IN THR

pane Court of ra United States

October Térm, 1969

BAY SOUND TRANSPORTATION CO. et al.,

Petitioners

ADDENDUM To

PETITION FOR WRIT OF CERTIORARI

To The United States Court Of Appeals

For The Fifth Circuit

Opinions of United States ‘Comme of Appeals for the

Fifth Circuit and United States District Court |

(S.D. Tex.)

OPINION OF UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT :

Before GoLDBERG and Morean, Circuit Judges, and

Lies, District Judge. — .

-Moraan, Circuit Judge: These related income tax re-

fund actions were consolidated and tried*before the Dis-

- trict Court [67-2 ustc 99641] sitting without a jury. This —

— aoe the taxpayers is taken from portions of twenty-

UNITED: STATES OF AMERICA, Respondent §

six (26) judgments of the District Court. The three issues

presented to this Court are: . ad Z

1. Whether the taxpayers’ estimated useful lives

.of certain vessels were “reasonable” in claiming a

depreciation allowance. Section 167 of the Internal

Revenue Code of 1954.. a

* 2. Whether taxpayer C. W. Edwards is entitled

to deduct claimed business entertainment expenses in

the absence of any record evidence under Section

162 of the Internal Revenue Code of 1954.

3>Whether the “principal” or “major” purpose for

the formation of multiple corporations was tax avoid-

ance. Sections 269 and 1551 of the Interfial Revenue

Code of 1954, ©

C. W. Edwards is the gas founder and still operates

to a large extent a number of partnerships and corpora-

tions engaged in the businéss of hauling crude oil and

distillate in the Louisiana and Texas coastal areas.

Edwards Transportation Company is the parent organi-

zation. It is a partnership set up in the early 1930's by

C. W. Edwards and another individual, now deceased.

In 1939, Edwards organized his first corporation, Barge

Transport .Company, for the benefit of his son, Keith

Edwards. From its inception, Barge Transport Company .

has conducted its business within the framework of the

entire Edwards organization. At the time of the trial in

the court below Edwards: was in his 70th year.

In 1955, it was decided that each newly acquired tow-

boat, pushboat, and barge should be owned and operated

by separate. corporations, Accordingly, by June, 1966,

the time of the trial below, nineteen separate business

/ \

organizations—one partnership and eighteen corporations

—each_owned one of-the- nineteen new vessels.

The Commissioner of InternalRevenue disallowed the

surtax exemptions of the corporate taxpayers under Sec- .

tion 269’ of the Internal Revenue ‘Code, contending ‘that

— >

1 Section 269, Internal Revenue Code of 1954:

SEC. 269. SANE aE TNS MADE- -TO EVADE OR AVOID °

INCOME TAX.

(a) In General. sictihicn

(1) any person or persons acquire, or acquired on or after October

8, 1940, directly or indirectly, control of a corporation, or

(2) any corporation acquires, or acquired on or after October 8,

1940, directly or indirectly, property of another corporation, not con-

trolled, directly or indirectly, immediately before such acquisition, by

such acquiring corporation or its stockholders, the basis of which’

property, in the hands, of the acquiring corporation, is determined

by reference to the basis in the hands of the transferor corporation;

and the principal purpose for which such acquisition was made is

evasion of avoidance of Federal income tax by securing the benefit

of a deduction, credit, or other allowance which such person or cor+

poration would not otherwise enjoy, then the Secretary or his delegate

may disallow such deduction, credit, or other allowance. For purposes

of paragraphs (1) and (2), control means the ownership of stock

possessing at least 50 percent of the total combined voting power of

all classes of stock entitled to vote or at least 50 percent. of the total

value of shares of all classes of stock of the corporation.

(b) Power of Secretary or His Delegate To Allow Deduction, etc.,

in Part.—In any case to which subsection (a) applies the Secretary

or his delegate is authorized—

(1) to allow as a deduction, credit, or allowance any part of any

amount disallowed by such subsection, if he determines that such

allowance will not result in the evasion or avoidance of Federal

income tax for which the acquisition was made; or

(2) to distribute, apportion, or allocate gross income, and distrib-

ute, apportion, or allocate the deductions, credits, or allowances the

benefit of which was sought to be secured, between: or among the

corporations, or properties, or parts thereof, involved, and to allow

such deductions, credits, or allowances so distributed, apportion =y

or allocated, but to give effect to such allowance only to such exte

as he determines will not result in the evasion or avoidance of:

Federal income tax for which the thar gee was made; .or-

(3) to exercise his powers in under paragraph (1) and in

part under paragraph (2), ;

\ .

the several corporations were formed for the “principal

purpose” of tax avoidance. Taxpayers contend that the

principal ‘purpose for creating multiple corporations was

to limit the liability of the Edwards enterprise. They al-

lege several other purposes for incorporating multiple bus-

“ inesses, and~assert-that tax considerations took a minor

role. | =

The District Court, following a non-jury trial of the

case, found that the entire enterprise should be treated

as a single business entity, rather than. as separate _cor-

porations. Although the Court did not specifically so state,

it bottomed its opinion of Section 1551 of the Code.”

It did not rely on Section 269, as was urged by the.

Commissioner.

* Section 1551, Internal Revenue Code of 1954: » }

SEC. 1551. [Prior to its amendment by the Revenue Act of 1964].

DISALLOWANCE OF SURTAX EXEMPTION AND ACCUMU-

LATED EARNINGS CREDIT. \

If any corporation transfers * * * all or part of its property (other

than money) to another corporation which was created for the pur-

pose of acquiring such property or was not actively engaged in busi-

ness at the time of such acquisition, and if. after such transfer the

transferor corporation or its stockholders, or both, are in control of

such transferee corporation during any part of the taxable year of

such transferee corporation, then such transferee corporation shall

not for such taxable year (except as may be otherwise determined

under section 269(b)) be allowed either the $25,000 exemption’ from

surtax provided ir section 11(c), or the * * * accumulated earnings

credit provided in * * * section 535(c), unless such transferee cor-

poration shall establish by the clear preponderance of the evidence

that the securing of such exemption or credit was not a major pur-

pose of such transfer. For purposes of this section, control means the

ownership. of stock possessing at least 80 percent of the total com-

bined voting power of all classes of stock entitled to vote or at least

80 percent of the total value of shares of all classes of stock of the

corporation. In determining the ownership * * *, the ownership of

stock shall be determined in accordance with the provisions of section

544, except that constructive ownership under section 544(a)(2) shall

be determined only with respect to the individual’s spouse and minor _

children. * * * :

/ 5

In the late 1950’s and during the taxable years 1957

to 1960, the corporate taxpayers estimated the probable

useful lives of their newly built vessels for depreciation

purposes pursuant to Section 176(a) of the Code.*. The

criterion is that the estimation must be “reasonable.” The

taxpayers estimated the usefu) lives of the vessels to be

seven years. The Commissioner maintained at trial that

the barges had a useful life of twenty-five years, and the

tugboats thirty-five years. The Court below found that

the tugs had a useful life of twenty years, except that

the useful lives of four tugs was fifteen years. The Court

also found that the gbarges had a useful 4 of fifteen

years, :

Vinsdnses object vigorously that the Commi sioner and

the District Court errgd in gauging useful life on the

basis of depreciation history of those vessels which were

constructed prior to 1955. The lower court in fact fotind

that the taxpayers’ actual past experience was) to retire

few pre-1955 vessels from ‘service. \

Alternatively, taxpayers argue that the trial cout should

have applied the doctrine of equitable estoppel” because

of alleged statements by certain Internal Revenue agents

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to officials of the taxpayers shortly before 1957 that the .- -

useful lives of seven years would be a criterion acceptable ©

to the Internal Revenue Service. The Court gave little

weight to taxpayers’ proof on this point and held, in any

3 Section 167(a), Internal Revenue Code of 1954:

SEC. 167. DEPRECIATION. . \.

(a) General Rule.—There shall be allowed. as a depreciation: de-

duction a reasonable allowance for the, exhaustion, wear and tear

(including a reasonable allowance for obsolescence)

(1) or property used in the trade or business, or

(2) of property held for the production of income.

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event, that’ such statements would not be binding on the

Government. . |

__. A report on the depreciable lives ‘of the vessels was

' prepared ‘by the Internal Revenue Service Valuation Anal-

ysis Branch. The report favored the taxpayers’ position.

The Government repudiated the report, and the trial Court.

gave little weight to the report. The taxpayers assert that.

. the report. was entitled to “considerable weight.” |

C. W. Edwards, individually, claimed business enter- —

. tainment expense deductions of several thousands of dol- :

_ lars for the years 1958 and 1959. The Commissioner

a disallowed the claims for the reason that Edwards failed

to prove the expenditures. Edwards regularly cashed

$300.00 checks for these expenses td ‘kept the cash in

his hip pocket, separate from his fro t pocket where he.

kept his personal funds. The District Court approved the

Commissioner’s ruling, stating that the claimed expendi-

tures were rtot substantiated by sufficient evidence. Ed-

wards argues that records of expenses were not required '

during the taxable years in question.

~ Alternatively, it is argued that the trial Court should

have employed the “Cohan rule” to allow a reasonable

approximation of the expenditures claimed by Edwards.

The Government retorts that the rule is inapplicable where

no clear evidence of any amount spent is advanced by

the taxpayer. aN

4 _ Section 167(a) of the Code authorizes\the taxpayer to

arrive at a “reasonable allowance” for depreciation. The

allowance is that amount which should be set aside for

the taxable year in accordance with a reasonably consis-

tent plan, so that the aggregate of the amounts set aside, _

plus the salvage value, will, at the end of the estimated

§1.167(a)-1(a).*

a ar

useful life of: the depreciable property, equal the cost or

other basis of the property. See Treasury Regulation

_ Salvage values are not involved on this appeal. |

The useful life of an asset is the period ond wk

of his income. See Treasury Regulation §167(a)-1(b).°

* Treasury Regulations on Income Tax (1954 Code):

, ; Sec. 1.167(a)-1. Depreciation in general.

; (a) Reasonable allowance. Section: 167(a) provides. that -a reason-

“able allowance for the exhaustion, wear and tear, and obsolescence of

‘property used in the trade or business or of property held by the <

¢-< taxpayer for the production: of income shall be allowed as a depre-

ciation deduction. The allowance is that amount which should be set .

aside for the taxable year in accordance with a reasonably consistent

amount set aside, plus the salvage value, will, at the end of the.

estimated useful life of the depreciable property, equal the cost or‘

other basis of the property. as provided in section 167(g) and §1.167/

(g)-1. An asset shalk not be depreciated below a reasonable salvage \

value under any method. of computing depreciation.. However,

section 167(f) and §1.167(f)-1 for rules which permit a reduction in

the amount of salvage value. to be taken into account for certain

_ the “asset may~reasonably be expected to be useful to -

~ “the taxpayer in his trade or business or in the production.

~ plan (not necessarily at a uniform rate), so that the aggregate of the .

personal property acquired after October 16, 1962. See also para- *

graph (c) of this section for definition of salvage. The allowance

shall not reflect amounts representing a mere reduction in. market

value. See section 179 and §1.179-1 for a further description of the

term “reasonable allowance’’.

° Treasury Regulations on Income Tax (1954 Code):

Sec. 1.167(a)-1.. Depreciation in general.

(b) Useful life. For the purpose of section 167 the estimated useful ;

life of an asset is not necessarily the-useful life inherent in the asset

but is the period over which the asset may reasonably be expected

to be useful to the taxpayer in his trade or business or in. the pfo-

duction of his income. This period shall be determined -hy reference

to his experience with similar property taking into account present

conditions and ‘probably future developments. Some of the ‘factors to

be considered in determining thisperiod are (1) wear and tear and

decay or decline from natural causes, (2) the normal: progress of the

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AA NEP RGIS EEN OMT, ENTREES

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“A study of Treas. Reg. §1.167(a)-1(b) makes clear

that the taxpayer’s past experience is but one of several

factors to be considered when estimating the useful life

of an asset. In addition to the taxpayer’s past experience

with similar property, “present conditions and probable

future developments” must be taken into account. °

The taxpayers maintain that the District Court ignored

evidence which showed several other relevant factors’ be-

Sides past experience. Apparently, the trial Court relied

heavily on the useful life experierice of the Edwards

Organization, with respect to the vessels constructed prior

to 1955. However, the District Court’s findings examine

in detail other \significant factors, such as the thickness

and quality of the steel hulls, changes in design of the

vessels, etc. ‘: ee

The repogs of the Valuation Analysis Branch of the

Internal Revenue Service recommended that depreciation

deductions for the vessels should be based on useful ‘lives

of ten to twelve years. The Commissioner. insists that he

never adopted -the report’and that, contrary to the tax-

th ustry and the taxpayer’s trade or business, (3) the climatic

and: local conditions peculiar to the taxpayer’s trade or business,

and the taxpayer’s policy as to repairs, renewals, and replace-

ments. Salvage value is not a factor for the purpose of determining

useful life; If the taxpayer’s experience- is inadequate, the ’ general

experience in. the industry may be used until such time as the tak-

payer’s own €xperience forms an adequate basis for making the de-

termination. The estimated remaining useful life may. be subject to

modification by.-teason of conditions. known to exist at the end of.

the taxable year and shall be redetermined when necessary regardless

of the method of computing depreciation. However, estimated remain-

ing useful life shall be redetermined only when the change in the

useful life is significant and there is a clear and convincing basis for _

the redetermination. For rules covering agreements with respect to*

useful life, see section 167(d) and §1.167(d)-1.

rf “economic changes, inventions, and ‘current developments within

- 9

payers’ position, he should not be bound by the sugges-

tions of the report. The trial Court originally excluded

the report because it was ruled hearsay. Later, *in its

memorandum opinion, the Court admitted it as a business

record exception to the hearsay rule, on the authority’ of

Brooks v. Texas General Indemni

16 (5 Cir., 1958). It is readily apparent from the:

Court’s. opinion, however, that, as the trier of - fact, dM

did not give the report much evidential weight. ° i

ane

Taxpayers argue that the Internal Revenue Service re- :

port. was deserving of substantial and perhaps controlling —

weight. On the other hand, it seems proper that the Dis-

‘trict Court, as the finder of fact, should -be allowed to

give the expert opinion in the report such credence as

he deems appropriate under all the circumstances of the ;

case. Sartor v. Arkansas Natural Gas Corp. “3 321 U. S.

620, 627 (1944).

The taxpayers assest that the Comuniasiones should be

equitably estopped to deny the seven-year useful life esti-

mate because ofthe alleged assurances of the local In-

ternal Revenue officials that such a period would be

acceptable. The evidence is contradictory concerning the

granting of such an assurance.’ In any event, the trial

Court found that at most the conversation applied to

only one vessel, the pushboat Letha C. 6

In 1956, nine months prior to the alleged conversation,

a new Treagury regulation, §1. 167(d)-1,° was pena»

_ ° Treasury Regulations: on Income Tax. (1954 Code):

“~~ See. 1.167(d)-1. oo as to Useful Life and Rates of Depre-

ciation,

After August 16, 1954, a taxpayer may, for taxable ys ending

after December 31, 1953," enter into an agreement with respect’ to

the estimated useful life, method and rate of depreciation, and treat-

we 7 3 | |

0., 251 F.2d 15,

RESETS

2 AEA oot: wae LOST A igctle

gated. The regulation provides for a method of concluding.

a formal agreement with the Government on the question

of useful life for future depreciation. Assuming that a

seven-year useful life was approved by the Internal Reév-

“enue agents, it was not arrived at in accordance with the

requirements of Treasury Regulation §1.167(d)-1. Any

Statement made concerning useful life would be un-

authorized.

It is the lack of authority in the agents that is critical. .

Assuming that the alleged assurances were given by the

_ agents, the statements were..unauthorized and the Gov-

_ €rnment will not be estopped by the unauthorized state-

'~“mnents of its agents. Sanders v. Commissioner [55-2 ustc -

9636], 225-F.2d 629 634 (10 Cir. 1955), cert. den. -

350 U. S. 967 (1956).The case of Simmons v. United

States [62-2 ustc 415,449], 308 F.2d-938 (5:Cir., 1962),

and the cases cited therein, do not appear to bé applicable.

In those cases there Wabi no controversy over the fact

that the crucial statements were made and that the state-

"ments were authorized. Such ‘are not the facts\in the

instant case.

ment of salvage of any property which is subject to the allowance

for depreciation. An application for such agreement may be made to

the district director of internal revenue for the district in which the

taxpayer’s return is required to‘ be filed. Such application shall be

filed “in quadruplicate and shall contain in such detail as may be

practical the following information.

(a) * * *

(b) * * *

(d) * * *

(e) * * *

(f) * * * :

The agreement must be in writing and must be signed by the tax- re

payer and by the district director.

ts a

The remaining grounds urged by the taxpayers on the

depreciation issue appear to be without’ merit. _ a

We hold that the findings of the District Court on: the

depreciation issue were not “clearly erroneous” and that

the Court should be affirmed on this issue. See Commis-

sioner ‘v. Duberstein [60-2 usTc 99515], 363 U.S. 278,

291 (1960). 5 Cig cae eee

On the business entertainment expense issue, C. W.

Edwards kept no records whatsoever of the claimed ex-

penditures for business entertainment. Even prior to the

1962 enactment of Section 274(d) of the 1954 Code,”

this Court required the taxpayer to demonstrate “with .

some substantiality” the extent of his personal obligation’

for entertainment expense. Williams -v. United States [57-2

* “ ustc 99759], 245 F.2d 559, 560 (5 Cir., 1957).

7 Sec. 274(d), Internal Revenue Code of 1954:

SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAIN-

‘MENT, ETC., EXPENSES. 3

(d) Substantiation Required.—No deduction shall be allowed—(1)

under section 162 or 212 for any travelling expense {including meals

and lodging while away from home), (2) for any item with respect

to an activity which is of a type generally considered to constitute

entertainment, amusement, or recreation, or with respect to a facility

used in connection with such an activit , or. £ °

(3) for any expense for gifts, .

unless the taxpayer substantiates by adequate records or by sufficient

evidence corroborating his own statement (A) the amount of_ such

expense or other item, (B). the time and place of travel, entertain-

ment, amusement, recreation, or use of the ‘facility, or the date and

description of the gift; (C) the business purpose of the expense or

other item, and (D) the business relationship to the taxpayer of

persons entertained, using the facility, or receiving the gift. The Sec-

cretary or his delegate may by regulations provide that some or -all

of the requirements of the preceding sentence shall not apply in the

case of an expense which does not exceed an amount prescribed pur-

suant to such regulations. Bah See

oy eS

saa ier itive 0 cee ow yh. +

The record fails t6 reveal that Mr. Edwards proved

even a portion of his expenses to be deductible. This fact

renders futile a court’s effort to determine that at least a ;

‘ given amount was actually spent or incurred as-an enter-

tainment expense. Mayrath v.-Commissioner [66-1 Ustc

99250], 357 F.2d 209, 214 (5 Cir., 1966). The rule in

Cohan: v. Commissioner [2 ustc 9489], 39 F.2d 540 -

3 (2 Cir., 1930), is inapposite under the circumstances ae

foe this case. pees San

‘On the multiple corporate: issue, although the District

’ Court did not specifically so hold, it is evident from read-

‘ing the lower Court’s memorandum opinion that the Court

relied on Section 1551 of the Code instead of Section

296(a), as was urged by the Commissioner in denying

the taxpayers’ separate surtax exemptions.

Section, 1551 is explicit in its requirement that the

transferor of property to the newly established transferee

corporate body must itself be a corporation. If the:trans-:

‘feror was not a corporation, then Section °1551—is-in-——_

applicable; The A issioner maintains that the trans- _

feror was 2 ree “Transport Company, a corporation; that

Transport Company which transferred the

rer acted vehicles to the new corporations. The

Commissioner urges that this Court hold that* such a

finding is implicit.in thé. lower Court’s memorandum

opinion, even though the: jlower Court did not make that

finding. jem

An examination. of the| entire oid has failed to reveal

any evidence that. Barge Transport Company, or any

_ other corporation, transferred the vesselssto the new cor-

porations so as to bring these various nn within

the purview of Section 1551.

ich Af the 18 cor-

pplies was acquired

The Commissioner contends tha

porations to which Section -1551

-in essentially the same manner. The

the vessel was made by C. W. Edwards; the vice-president

__ of the Barge Transport Company, the original corporxation,

after consulting with his son, Keith Edwards, the presi-

. dent, Jack Redding, the secretary and treasurer, of Barge

Transport Company, and others. While the vessel was

under construction, and about the time for delivery there-

of, financing of the cost would be arranged. After the

ion to cqnstruct ©

decision to construct each vessel was made, and the order _

therefor was placed with the company doing the construc-

tion- work, a new corporation was organized to receive ©

the vessel when completed. All property rights that existed _

in the vessel were acquired by, the new corporation, and -

when and as the vessel was completed and delivered the

new Corporation took title. Each corporation acquired

only one vessel: The above-summarized evidence is insuffi- .

‘cient, to support the conclusion that there was a transfer

of property from Barge oe Company to the. newly

acquired: ‘Corporations.

“The surtax’ Skemptions here in question were not -pro-

perly., disallowed under the provisions of Section 1551.

However, the Government contends that, if the Court does

not agree that the record will support no finding other .

than that tax avoidance was the principal purpose of the

__ transactions in question, the case should be remanded to

the District Court for additional findings as to the appli-

cability of Section 269. We agree that if Section 1551 is

not applicable that this Court should direct that the case

be remanded for the District Court to determine if Section

269 is applicable to these transactions and also to the

- Aransfers of the vessels CT&J and Toni Ann.*

As its title denotes, Section 269 is designed to Prevent

“acquisitions made to evade or avoid income tax.” How-

ever, the section is applicable only in certain carefully

’ circumscribed situations—it may be invoked only where

there has been an acquisition of control, the principal

purpose of which is eVdsion or avoidance of taxes.

Section 269 provides that if any person’ acquires control

of a corporation and the principal purpose of this acquisi-

tion is evasion of income taxes by ‘securing the benefit

of a deduction, credit, or other aliowance, which he would

hot otherwise enjoy, then the deduction credit or allow-

ance ma be'disallowed. The determination of the tax-

payer's. principal purpose in incorporation is a question

of fact that depends upon the intent of the taxpayer at

the time he acquires control of the corporation. See Air-

port Grove Corp. of Polk County, et al. v. United States

of America, 5 Cir., 1969 [69-1 ustc 49267] —F.2d —

[No. 25701, March 11, 1969]. The taxpayer ha’\the bur-

den of proving that control was not gcquired for the

unlawful purpose. American Pipe & Steel Cotp. v. Com-

missioner [57-1 UsTc. 19590), . 343 F.2d 125 (9 Cir.,

1957).

The District.Court did not make findings on theggues- ©

tion of taxpayers’ “principal purpose” under Section

269(a). The issue of “principal purpose” is one of fact.

For this Court to hold that the “principal purpose” of

these transactions was “evasion or avoidance of federal

income tax,” when the Court below failed to consider this

* These two vessels were transferred to Bay Sound Transportation

Company and Riverside Transportation Company from Louisiana

Transportation Company, - a partnership.

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matter, and when the facts might suggest a contrary con-

clusion under Section 269, would be wholly inappropriate.

In cases tried without a jury, Federal Rules of Civil Pro-

cedure 52(a) directs the District Court to determine the

essential facts upon which it bases its judgment; where

the trial Court fails to do so, this Court cannot make such

findings of fact. S. S. Silberblatt, Inc. v. United States

ex rel. Lambert Corp., 353 F.2d 545, = (5 2

1965).

The findings and conclusions of the District Court are

AFFIRMED on the issues disallowing taxpayers’ claimed

depreciation and entertainment expenses.

We disagree with the disallowance of the surtax exemp-

tions under Section 1551 and REMAND the case to the

District Court to determine whethér or not the findings

of fact on the record are sufficient to disallow the exemp-

tions of the surtax under Section 269.

AFFIRMED in part; REVERSED and REMANDED

in part for furthe proceedings not inconsistent herewith.

ee :

CT.

Auited States Court of neta:

’ FOR THE FIFTH CIRCUIT -

October Term, 1968

| No. 25,729

D. C. Docket Nos. CA 63-H-73, 75 thru 99

& 66-H-462

BAY SOUND TRANSPORTATION CO PANY,

ET AL., Appellants,

versus

UNITED STATES OF AMERICA, Appbllee.

Appeal from the United States District Court

‘for the Southern District. of Texas ie

Before GOLDBERG and MORGAN, Circuit Judges,

and LIEB, ced Judge. °

| ~'{/ JUDGMENT

This.causé came on.to be heard on the transcript of

the record from the United States District Court for the

Southern District of Texas, and was argued by counsel;

17 -

ON CONSIDERATION WHEREOF, It is now here

ordered and adjudged by this Court that the judgment

of the said District Court in this cause be, and the same

is hereby, affirmed in, part, and reversed and remanded

in part for further proceedings not inconsistent with the

opinion of this Court;

It is further ordered! that appellants be condemired to

pay one-half of the costs if this Court, and appellee be

' condemned to pay one-half of said costs.

igh April 30, 1969

Issued as Mandate: June 13, 1969 «

ORDER AMENDING JUDGMENT

It is now;hereby ORDERED and ADJUDGED by this

Court that the prior judgment in the above-styled action,

dated April 30, 1969, be amended as to the assessment

of cogts as follows: Petereys =

The appellee is condemned tu pay one-half of the

costs to the extent expressly permitted by law, 28 U.S.C.A. _

§ 2412(a). (The 1966 amendment to this Statute not

being applicable in that this action was filed before

July 18, 1966, Allen v. Rachal, D.C. Tex., 1967, 283

F.Supp. 986). Appellant is condemned to pay all re-

maining costs.

IN THE

Yuited States Court of Appeals

FOR THE FIFTH CIRCUIT

No. 25729

BAY SOUND TRANSPORTATION COMPANY,

ET AL., Appellants,

—

versus , %

UNITED STATES OF AMERICA, Appellee.

Appeal from the United States District Court for

the Southern District of Texas ‘

(Filed May 30, 1969)

_ON PETITION FOR REHEARING

Before GOLDBERG and MORGAN, Circuit Judges, and ,

LIEB, District Judge. 6

PER CURIAM:

. IT IS ORDERED that the petition for rehearing filed

in the above entitled and numbered cause be and the same

is hereby DENIED.

OPINION OF UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

_ (Filed August 30, 1967)

(Caption Omitted)

[9641] Bay Sound Transportation Co. v. United States

of America. Coastal Transportation Co. v. United States

of America. The Christine Towing Co. v. United States of —

America. Riverside Transportation Co. v. United States of

America. Murray Bay }ransportation Co. v. United States

of America. Dixon Bay Transportation Co. v. United States

of America. Green Bay Transportation Co. v. United States

of America. Erie Barge Co. v. United States of America.

Ev Barge Co. v. United States of America. Gulf Storage~

Company, Inc. v. United States of America. Lavaca Barge.

Co. v. United States of America. Naphtha Barge Co. v.

United States of America. Navidad Barge Co. v. United

States of America. Wolverine Barge Co. v. United States

of America. Huron Barge Co. v. United States of America.

Michigan Barge Co. v. United States of America. Superior |

Barge Co. v. United States of America. Ontario Barge Co.

v. United States of America. St. Clair Barge Co. v. United

States of America. Jack Barge Co. v. United States of

America. ©. W. Edwards & Letha C. Edwards v. United

States-of America. Keith S. Edwards & Mary Edwards v.

United States of America: John E. Redding & Violet Red-

ding v. United States of America. Everett L. Meley, Jr. &

Helen D. Meley v. United ’States of América. Maurice H.

Hoffman & Lurline M. Hoffman v. United States of Amer-

ica.. J. E. Redding, Trustee of the Shirley & Garland

Fielder Trust, & Garland W. Fielder v. United States of

America. William N. Blair & Glynn Blair v. United —

of America.

U. S. District Court, So. Disi. Tex., Houston Div.,

CA’s. 63-H-73, 63-H-75-63-H-99, 63-H-462, 8/30/67.

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Memorandum Opinion

Hannay, District Judge: These suits are for the recovery

of claimed overpayment of income taxes and interest paid

under protest by the various’ plaintiffs together with statu- .

tory interest; the names of the various plaintiffs, the taxable

years involved in the vatious suits, and the aggregate

2 @mounts involved are as follows:

Plaintiff

Bay Sound Transportation. OA eek

Coastal Transportation Co. °

The Christine Towing Co.

Riverside Transportation Co.

ee eeee

Murray Bay Transportation Co. ....

Dixon Bay Transportation Co. .....

Green Bay Transportation Co. ......

-Erie. Barge Co. ...%.....,.

Ev Barge Co.

Gulf Storage Co., Inc. ....

Lavaca Barge Co. By eb

Naptha Barge Co.

Navidad Barge Co.

Wolverine Barge Co.

Huron’ Barge Co. .:......

Michigan Barge Co. ......

creer eeee

eee eeeeves

62208 0 ©

eereeeeeense

». 0 2 6 8 9 6.00

‘

eee ee ewes

ee oe oe ee |

Superior , Barge) Co. .....0. 4.0.0 000.

Ontario Barge Co. ...... 7

St. Clair Barge Co. ......

jack Barge Co; “.:.......

C. W. & Letha C. Edwards

Keith S. & Mary Edwards

John E. & Violet Redding

> Seat

id Vad eeeee

« OS. eeeee

‘

eeseeeevene

Everett L. & Helen D. Meley, Jr.. :

Maurice H. & Lurline M. Hoffman. .

J. E. Redding,

as .Trustee of the

“Shirley & Garland Fielder Trust &

Garland W. .Fielder-....

Total Amount in, Dispute :

eeeereeeee

eeeese50e’s

Taxable

years ending

2-29-60

11-30-57/58/59

1-31-59/60 |

11-30-59

3-31-60

4-30-60

_» 7-31-59/60 -

12-31-58/59/60

9-30-59/60

11-30-59/60

12-31-58/59

11-30-59/60. ~

7-3 1-58/59/60

2-28-59/60

-2-28-59/60

8-31-59/60°

8-31-59/60

4-30-59/60

12-31458/59

12-31-58/59

“¥, °

-1231-58/59

Amount

* $ 6,889.39"

18,759.38

19,074.09

7,444.25 °

8,441.99

ay 9,244.96

17,615.73

4,134.23

22,018.87

- 6,030.35

11,335.52

19,112.34

11,180.18

* 14,796.70

~ 3,115.89

4,422.33

10,442.51

10,422.51

16,328.18

88,704.60

67,134.93

602,34 .

559.99

192.76

232.25

$382,678.57

mse

; The cases were tried to the Court without a jury. A |

_ number of motions: with reference to the admission of

evidence were taken with the-case. They will be discussed

- and ruled upon later in this memorandum opinion.

i é

Questions Presented Vor Decision

1. Whether plaintiffs’ should use useful lives of 35 years.

1 The plaintiffs involved in the depreciation issue are as follows:

‘ Civil

Name of Plaintiff ? Action No.

Bay Sound. Transportation Co. eee Clr ee eee CP eee 63-H-73

Coastal Transportation Co. ........3....... eke aioe oe 63-H-75 ;

Christine Towing Co. ................ aoe es oceecet ls 63-Hi76

» Riverside Transportation Co. ...............4. erecrn 63-H-77

Murray Bay Transportation Co. ...... paliewas et * 63-H-78

Dixon Bay Transportation Co. ............ Tatupakes 63-H-79 »

Green Bay Transportation Co. ....3..........00.0000e 63-H-80

BOO BE Oe vos e ic ise seeds STTC Perey terre eee 63-H-81

rE A xs. Zoib oy bg cov bv'ke cova’, Serrrereer ns

See WN Oe otha ches cease ds Ph DM Seren Eee

Lavaca Barge Co: ...... | POS BERGER Red Pe aed Eee _ 63-H-84

Naptha Barge Co. ....: PR rr eer Sry ere 63-H-85

A SR ee ees eran, Cone pena! 63-H-86

_ Wolverine Barge Co. .......... ae ae ece USA Es Da .. 63-H-87

‘ Huron Barge Co. ......... ates ed ie ie beavals wadibe ac 63-H-88

Michigan Barge Co... ....6..00000: peer shettege'es 63-H-89

Superior Barge Co. : eawowes EP eel Pla erage Cay ee AN es 63-H-90

Ontario Barge Co... .¢.6......4. wee ene nt eee eee SOSH-OR sd

St. Clair Barge, "SEBS Seam bela int nOn) 63-H-92

EN opine ep osnes La Wovneey is éirscws 63-H-93

Partners in Louisiana Transportation Co., (later called Oil Cities -

Transportation Co.):

a Me EE 8% o7o Oe 0o-a htc sense des CR Se 63-H-94

J. E. Redding ...... Sak Sa wate hhh gs , SE heehee 63-H-96

LS “=e ++) baccenenel : 63-H-97

Je Ti. FE STII oie pic Sees cece wie be apc GS<EE-99

_ Partners in Sterling Barge Line: “, ¢ a

FG on wade nancy phan EE Ed Ce TE ee 63-H-95

C. W. Edwards ........... eb kants sah si +he eee § ... 63-H-94

for tugs and pushboats, useful lives of 25 years*for barges,

and salyage values of 10 percent of original cost in cal-

culating their depreciation deductions as the Government

contends or shorter periods as the plaintiffs contend.

2. Whether the 21 corporations involved in. the Bdwandy

boat and barge business are entitled to calculate their in-

come taxes with the maximum of $25,000 of taxable in-

come subject to ‘the 30 percent. rate (the balance being

taxed at the 52 percent rate) as the Government contends,

or with a maximum of $525,000 taxed at the 30 percent

- rate ( the balance being taxed at 52 percent) as the cor-

porate plaintiffs? contend.

3. Whether corporate plaintiffs must capichias tint or-

ganizations costs and deduct them upon surrender of the

—_—_—_—_—_————_ oe : v

2 The corporations involved in this issue are:

Civil

: Name of Plaintiff Action No. .

Bay Sound Transportation Co. ..:.. Chases Re 63-H-73_°

, Coastal Transportation Co. ............4% Pea wk pees . 63-H-75

' Christine Towing Co. ..+..... Lp IMUAR Sik re eee eNaee 63-H-76

1 Riverside Trimaportation Col... . 2... is ceieccocccere 63-H-77

Murray Bay Transportation. Co. ............ pons & 63-H-78

Dixon Bay Transportation Co................ Wreertr es os Me

Green Bay Transportation Co. ........... ses ee 63-H-80

Brie Barge. Co. .. «0s. 5. Revaloctsvinebayetane thes 63-H-81 |

I inva ceed vere ks Pebe Pech RRO ERES 63-H-82 -

See SN MS sk nhs Caeawinw 5a ae ove veee's ... 63-H-83

Lavaca Barge Co. ........ SST ek OO Se GEER BE 63-H-84 ©

POM SNE BD. 5 Fv aw ccc os ci cnecvivce Corns ccs | Gp-EEtee

ss hag 4s bo 6 ok BEA Bi Ove eu dine 08 63-H-86

rey ee eee ... 63-H-87

Ek oa Vane ows 4's see ss bien ab eNdisee pees * 63-H-88

' Michigan Barge Co. .... - Navevasaseaeeens Review ees 63-H-89

SE EG, 6 boo bo ob 5 5 06 sew od tons wees dads 63-H-90

I EE GAN ei civ eae enc cesttonsevensesess ,- 63-H-91

ee Se EO, oo N64 bs WOahon Co eee 40-08 eeeae -63-H-92

. 2 ft ee errs e tere Tree A Pekees Sewkwsees 63-H-93

ty,

23 De

corporate charters as the Government contends, or whether

they may deduct such costs as a current expense, or in

the alternative, amortize them over five years as the plain-

tiffs contend.* .

4. Whether C. W. Edwards may deduct $9,500 and

$13,100 of personal checks cashed, in 1958 and 1959, .on

the theory that such amounts were used for travel and

entertainment expense.

ais Whether Keith Edwards should be taxed on interest

constructively received during 1958 and 1959 of an ag- -

gregate of $24,180 as the Government contends or whether

such mount was income during 1964 when Keith Edwards-

finally claimed the cash as he contends, .

Statutes and Regulations Involved

The text of the pertinent statutes and regulatiogs are set

out in their entirety in Appendix A, infra\,

3 The plaintiffs involyed in the organizational apa issue are:

» . . Civil

Name of Plaintiff ; ; Action No.

Bay Sound Transportation Co. Pee Neng ews tenes ess . 63-H-73

erside..Transportation Co. ........... eee ey ere Tre 63-H-77

Murray Bay Transportation Co. ...-................ 63-H-78

Dixon Transportation"Co. ..... rT ee g:--- 63-H-79

’ Green Bay Transportation Co. ...............,..... 63-H-80

SE aay oi pn uin ois mace a erty ey eee 63-H-81

Lavaca Barge Co. ......1..... PS ey re Fe See kees 63-H-84

% eens MNS COON. osc c aos cece cac SS acpi ie Bae 63-H-85 |

Pe I Na nine dk v a wads Loe iu v's ania 63-H-86

I I FOI ng kN a ek pa cb whey ode e cee las 63-H-88

‘ Michigan Barge Co. ...... ewer sk oe oa Sars Tekexee 63-H-89

on en 5. SERRE ene “63-H-90

Ontario Barge Co: ........... MERE S RES SARS Hee Nes 63-H-91

St. Clair ae _. Sa a RaCe Ae he OE eat on ar 63-H-92

ReeaeatIN

24 .

| Statement

Because of ‘the complexity of the facts and the number

of parties involved in these cases, the Government en-

deavored to make a complete and detailed statement of the

facts offered into evidence, issue by issue:

. As.to the depreciation issue: | 5

1. Mr. Charles W. Edwards who is now past 70 years

old, originally went into the business of. transporting crude

oil and petroleum products by tank barge when he was

-.¢ @ young man. (Tr. 78-79). Mr. Edwards’ father, had been

in the boat and towing business in and around Houston

and Galveston, Texas, since 1889. (Tr. 39-43, 1384).

2. During and prior to the early 1930's, William Helis, a

of New: Orleans, Louisiana, ‘was active in the oil and gas

exploration and production business. At that time Mr. Helis

had considerable oil production in the swamp areas in

South Louisiana. Mr. Edwards negotiated with Helis with

the view to making a partnership for the purpose of.trans- -

porting all of Helis’ production fram well sites or gather-

ing points in the marsh areas to refineries. The resulting‘

_ partnership in which each had a 50 percent interest, was —

known as Edwards Transportation Co. (Tr. 41-43). Dur-

ing 1950 Mr. Helis died, but Edwards Transportation. Co.

was ‘continued, Mr. Helis’ estate being substituted as a

partner. The business activities of Edwards Transporta-

tion Co. (which were expanded during the late 1930’s to

serve the oil industry in general), have continued through

the years and are still conducted from the company’s

headquarters in Houston.

'../3. Edwards Transportation Co.,. during the mid 1930's,

acquired four tug boats and seventeen barges. By date of

“@

trial of these cases, six barges had been disposed of. All

of the vessels have been and are being used full time in

Edwards Transportation Co.’s operations. The following

.tabulation reflects data with respect to all of the tug boats

and barges owned and operated by Edwards Transporta-

tion Co. since its inception. acd :

[Edwards Transportation Co. Chart on next page.]

-4. During the 1930's and 1940’s, as Edwards Trans-

portation Co.’s business grew and services were being per-

formed for the oil industry in general, additional vessels

were ‘acquired. The next vessels utilized in“the Edwards

organization were owned by a corporation known as Barge

Transport Co., organized July 27, 1939. Mr. Charles |

Edwards ( the partner in Edwards Trarisportation Co.)

years ago owned most of the stock in this corporation and

transferred such in trust for benefit of his son, Keith.

(Tr. 80-83). Before the taxable years involved in this

‘Suit, the stock was distributed to Keith so that: during the

years in suit he’owned such stock. (Tr. 80-84; G. Exs.°7

& 8, pars. 7). : x‘ ae

5. The activities of Barge Transport Co. wee essentially

_ the same as Edwards Transportation Co. (Tr. 80.86), and

during the years from its inception the corporation owned

and operated two tg boats, five barges, and one small —

boat. Data with respect to all of the corporation’s vessels

are as follows:

[Barge Transport Co. Chart on next pave.]

6. Edwards Transportation Co. and Barge Transport Co.

have always operated out of Houston. As these two com-

panies’ business grew, additional vessels were acquired by |

related business organizations and integrated into the two:

companies’ fleet. (G. Exs. 7 & 8, pars. 29, 33, 34; Tr. 87-.

| ; | \

26 =

91, 840-41). The new tein were controlled andj dis-

patched by Edwards Transportation Co. ‘and Barge Trans-

port Go.. (Tr.-852, 854, 91-93). The . business organizae

tions that owned the new vessels were paid monthly (based

on time and distance factors) by Edwards Transportation

_ Co. ‘and Batge Transport Co. sa use of the equipment

(Tr. 94, peated 858-859).

7. Thus; it was that Wilkins Barge Line, Ltd., was or-

ganized on February 16, 1944. (Tr. 87-92). This partner-

ship during the years before the Court was owned two-

thirds by Keith Edwards and one-third by a man named

Wilkins. (G. Exs. 7 & 8, pars. 6). The Barge Delta Joint

Venturg-was organized March 7, 1951, with C. W. Ed-

wards as a 50 pertent and Delaware Trading Co. (a party

not otherwise involved) as the other 50 percent partner.

(G, Exs. 7 & 83 pars. 5). Next, Louisiana Transportation

Co. was organized on January 1gp1952; during the years

before the Court that partnership (which was renamed Oil

Cities Transportation Co. in August 1959), had nine pe

ners, the interests of which are set out in the margin.‘

(G. Exs. 7 & 8, pars, 1. 39). Finally January 18, 1952,

another partnership, Buffalo Bayou Transportation Co. was

or ; during the years before the Court this organiza-

tion had five partners, data with respect to which is set °

om Percentage of

~af Partner . '. Partnership Interest

PE scccigebecnpereasvedexeeweiaben 69.131

Jo VE. ROMMMR. ow cc dicccces beawheboebessbeness 5.217

BE. L. Meloy, Jf. X........020500% bao snosnvecews 5.217

i co dececdpacmesinetoh 73 mae POO, ta

[i a Pde bbavasc nes eae ens ialchie titan cia’ 4.348

J. E. Redding, Trustee (On August 1, 1959 this

interest was conveyed to Inez Weaver) fideoie\s 3.478

ee Th dees snkevovsbendendedsiedscnes 3.043

A dinceseetreeenescensnxnskios gee 2.609

SE Stde cebepcernresésodsnvieberecdess 2.609 |

« “%

Mamber 47—137 Court Decisions—Cited 67-2 USTC

930-47

EDWARDS TRANSPORTATION CO.

eat

Date Dis-

posi:

Bay Sound Transportation Co. et al.v.U.S.

= * 8 8 © *.%8 & & 8 8.8.8 8&8 8 4.8% 6

Aerecee THE ghteas

is oars. 2 ee aR oy

A i ee a a

so 62-2 2 ee oe oe a 3S

es i se “fe

‘Cag re ay ae ee “+e -

a a oe ee ae » 2,0 * “* -

¥ie =o 2 =) 6:5 “a, ne Se © ete

ia] peaaieasen

i panEROUNERIUN GHA

ig| HuNNRRAgnEaunepusexy

toi iil

BESRSeR : 3)

Ssengeng :

ee ae ‘i

Type

Year Year

Vessel Built Acquired

Name of Vessel

85,133

*t dgiea |

Po s3sss8

A: 38333

a oe

RR & OR

43 tn

[kim ne ee

ia as eR eS oa

I, MEI: RL ONES

ooh

. . 5

, 4 : Q

- -*

\ eet

“ ta

‘ YK

‘\ a BS

2 7

.Y : ;

SG the, margin.® (G. Exs. 7 or 8, pars. 4).

Data with respect to all of the vessels eins by the

four ° ‘organizations. mentioned in ‘the previous paragraph |

9, The bu iness of Edwards Transportation Co. and

Co. continued to grow and during the

middle and late 950’s there was a need. to add additional

vessels to the fleet. (Tr. 58). Nineteen new vessels (5 tugs

and pushboats and barges) were acquired and placed

into operation between\1955 and the end of 1959. These

new vessels, as were the vessels before them, operated on

a “dispatch” basis, through\either Edwards Transportation

Co. or Barge Transport Co: , the. two original organiza-

tions. (Tr. 836- 37, 842, 852, 4-55). The nineteen new:

vessels were acquired in nineteen different business organ-

‘ izations, one partnership, and eightsen corporations. |

10. Data as to the nineteen vessels a uired during 1955.

through 1960 are: as follows:

_ [Chart on page 85,136]

10A. The thickness of the steel ej in a>dvesie con-

_Sthacted during the 1930’s is the same as the thickness of

5 The partners in Buffalo Bayou Watiaiertitiaa Co. in the years

before the Court ‘are as follow:

. Percentage of-..

Name of\ Partner Partnership Interest *

ED | cc a xdbee hes en eee noks ev aweken ae

ie a: EE Dee vick ews cnaneues ise bee enae 23

Ss 5 PT ee ee ixepentawaes med |

aN Herbert S. Fislier,\Trustee .............. : cekeces 5:

Ny Dep BRO now aa\ bc dic cpeccovectiocs st cgeccey 4

On September 30,, 1961, Ruffin sold ie 4 percent to Keith S.

| Kdwards.

. those constructed during ‘the 1940’s and 1950’s. (Tr. 702,

1004, 1010, 1033, 1399, 1405). The only exception is

with respect to those barges designed for use in the- Gulf

of Mexico whith were*of heavier gauge steel. (Tr. 1464).

There is some suggestion in the evidence that the vessels . =

constructed ‘during the 1930’s were made of “copper---~

bearing ‘steel” which means that the steel contained be-

tween 2/10 percent and 5/10 percent copper (Tr. 1003;

1005); however, this fact is not established by the record.

(Tr..1003). Copper-bearing steel and “mild steel” (of *

which later vessels were constructed) ¢orrode.at approxi-

_ .mately the same. raté in salt. and fresh water. (Tr. 712;

1584-86, 1600; G. Ex. 11.) However copper-bearing steel

deteriorates more slowly than mild steel in the atmosphere. —

(Tr. 1591-92, 1599). Coatings of various sorts (particu-

larly epoxy) applied to both types of steel exposed to

the atmosphere retard. corrosion to a marked degree. (Tr.

711, 713, 1579-90, 1599). The Edwards fleet is and has

been in the process of receiving original and renewals of

epoxy coating. (Tr. 709-11, 1205, 1397, 1404-05, 1456,

1462). 7 ,

11: Although the so-called “spoon bill” design of barges

has been known and used since the late 1940's or early

1950’s, none. of the vessels in the Edwards fleet .con-

_ structed through the end of 1959 wére of such design. .

(Tr. 775, 947, 1420). However, vessels constructed and

- added to the*Edwards fleet during the early 1960’s were

of the “spoon bill” design. (Tr. 779,.917). This design

apparently enables a barge to move through the water as

mtch as one or two miles an hour faster (using the same

pushing effort) as. conventionally designed barges. (Tr.

917). However, the conventionally designed barges con- .

- structed for the Edwards fleet through the end of the

ee “ss

son “aay

: ‘

30 7

1950’s are a being constructed and put: into service

"* today. (Tr, \1409, 1463-64, 1478).

12. The ‘voces’ ‘in the Edwards fleet are used basically

in four different bodies of water: (1) offshore in the

Gulf of Mexico which is deep salt water; (2) the Mis-

sissippi River around New Orleans which is déep fresh «

water; (3) the Intracoastal Waterway which is relatively

shallow, and at places brackish, salt and fresh water; and

(4) the bayous, marshes and private canals in the Louisi-

ana Gulf Coast area which are shallow and brackish and.

salt water. (E.g., Tr. 915).

13. Gretually, as the Edwards fleet expanded, Edwards

‘_ Transportation Co.. and Barge Transport Co. contracted

with numerous oil operators and producers to perform the

same services originally performed for Heiis. Their services

- entail transporting petroleum. products from field gathering.

points to refineries. The field gatherin ints are located

in vartous swamp areas in south Fk toy and the off-

shore_wells are off the Jlexas and Louisiana coast. From

the gathering points, the Vessels would proceed to points ‘of

discharge, using in [94] most instances the Intracoastal

Waterway, Houston Ship. Channel, and the Mississippi

River. As the vessels proceeded through the various bodies -

of water they were subjected to the various physical con-

ditions present, such as shallow channels, etc.

. &

Number 47139 Court Decisions—Cited 67-2 USTC

9-20-67 . Bay Sound Transportation Co. et al.v.U.S.\.

He indy rizr: fe /

Seo ae

tea yosmogan is oes. a a a: |

pacooel TWAL wy sowssezeu 7S seam - J |

lie: : fede. $2tt2 ie,

ie ee af

: om

"Pho ened 1 ov BR: 8 8% anan: sz

G5 REEES gy aati

- mamaovann $EE g SE SEGRE 8 Sage

nin

pom os th H re i hae

Wilkins Barge Line, Ltd:

Barge Deita Joint Venture .

1967 andar Federal Tax Reports

ag PNET EN, ERIN ROIS II TON OTT A RTD

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Number 47—140

U.S. Tax Cases

Bay Sound Transportation Co, et al.v. U.S.

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9-20-67

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14, Although there are no records to indicate how

many~times it occurred’ through the years the vessels

frequently rubbed bottom. (Tr. 704, 1008-09, 1411,

1455, 1459, 150607). Sometimes such-rubbing resulted

ina puncture o the steel. Other times, the bottoms were

dented. All of this has recurred over and over as to all

-of the vessels. s

15. As a result of the ils rubbing on. ees bottom,

‘striking together and against docks, bridges, etc., the metal

bottoms, sides, fronts, and rears of the barges and boats

from time to time had to be renewed. The Company’s

experience is that the. various bottoms had to be: replaced

in anywhere from six’to ten years (Tr. 731-32) and the -

“knuckles” (where the bottoms join the fronts, sides, and

rears) had to be renewed in from three to five years.

(Tr. 731). All of the barges have been subject to United

States Coast Guard inspection as carriers of Class B cargo

(petroleum-and petroleum products). (Tr: 844, 1243-45).

These inspections occur periodically and the Coast Guard

requires that. the bottoms, sides, fronts and rears of the

vessels be renewed when the original metal has deteriorated

. to 75. percent or less of its original thickness. (Tr. 161,

843-44). When and: as necessary, the vessels have been

renewed. (See par. 20, infra; Tr. 99, 761, 768, 772-75,

1395-1400). When vessels are not renewed they must be

removed from service.

16. The> Edwards fleet and the various organizations

that own the vessels have always followed a_ practice of

charging to expense items such as new bottoms for barges,

-etc., even though such portions could be expected to have

_- a useful life of greater ‘than one -year. This depreciation

_ treatment—has-been done with the acquiescence of ‘per-

~ sonnel of the Internal Revenue Service. (Tr. 514, 517-20,

848-49). .

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» 17. The cargo transported by the barges in the Edwards ~

fleet i in the early years was in great part crude oil. In later

‘years, more and more distillate ‘has been transported until

_ during the years before the Court about half of the cargo

was crude oil and the other half was distillate. (G. Exs.°9 -

& 10, pars. 2(s)). Distillate has a characteristic of clean-

ing the inside portions of a tank barge so as to expose

the inside to the air inside the barges; (Tr..283) on the

other hand, crude oil has a tendency to coat the interior

portions of the barge so that the metal is not exposed to

air inside the barges. (Tr. 283).

18. The Edwards fleet’s barges have never’ been manned;

crews, of course, man the various boats and-are present’

on the barges that are in the boat’s tow. During the 1930's —

and 1940’s members of the boat’s crews ‘worked, in their

spare time, scraping and repainting the exposed surfaces on

of the barges. and boats on which they worked. With the ~

passage of years,-this practice has decreased due. primarily

to the reduction (brought about in a desire to reduce

’ costs) in the number of men on the boats. The day to

day preventive‘maintenance on the Edwards fleet has thus _

. decreased. (Tr. 856),

ee A) BLE gene -

19. Edwards Transportation Co. has been cig

profitable through the years. During 1958 and 1959 Mr.

.C. W. Edwards’ 50° percent distributive portion of. Ed-

‘wards Transportation €p. produced for him respectively

$72,157 and $93,811. (G. Exs. 7 & 8 pars. 78).

Louisiana Transportation Co.,- the partnership, has ‘alsa

been extremely - lucrative for Mr. Edwards through the

_years, and- during 1958 ahd 1959 it produced, : for his

“°69 percent interest, distributive’ shares of $262,962 and -

$367,909, respectively. (G. Exs. 7 & 8, pars. 78). Sterling

he Mee #

- barge "ue, the pagtnership.which operated the Edwards _

_ fleet’s most expensive vessel (the Letha c., which “Lost. -

*-$325,000) ‘generated for Mr. Edwards’ 50 percent in-.

“terest $24,136- -and $39,323 during 1958 and 1959. (G.

-Exs. 7 & 8, pars. 78). Mr. Edwards’ personal income tax *

bracket was in EXCESS. of 90 percent during the years in-

volved. (Tr. 204). Mr. Edwards personally received 4% of :

a cent per barrel for all crudé oil or distillate transported. :

20. The following table teflects, by year, from ‘date of —

vessel . acquisition the-(1). total’ revenue earned (net of...

amounts paid out for chartered: equipment’ and vessels); .

(2) arsounts ‘ctrrently deducted by the owners.as re-

pairs and maintenance expense (even though such items

including replacing vessels’ sides, bottoms, knuckles, ste. 2

and (3) taxable income — “by vessel:

— eee anal

| €

36 :

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85,138 U. 8. Tax Cases Mamber 47—142

Bay Sound Transportation Co. et al.v. U.S. ; 9-00-67

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Number 47—146 °

| U. 8. Tax Cases

Bay Sound Transportation Co. et ol.v. U.S.

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21. Vessels such as the boats and barges owned by the

Edwards interests can be kept in serviceable condition and

their useful lives can bg prolonged swage al if the _

owners spend the necessary funds to renew repair, and:

maintain the’ vessels. (Tr. 698, 771-72, ; ' 694; 1002-03, ‘

1020, 1062, 1072, 1206-07, 1402, 1406). ‘ ;

’21A. The useful life of barges or tugs’ ‘to the Edwards

interests is directly related to whether the Edwards inter-

ests find it economical to continue to use the vessels in

_ their operations. (Tr. 694, 696, 1209, 1217, 1225-26,.

1479). 3

21B. The Edwards interests have found it economical

to. utilize their vessels for their full physical life. The policy .

‘of the Edwards interests over the past thirty years has been:

tc expend money as necessary to keep their vessels in good

working condition, and accordingly to prolong the useful

life of their vessels. (Tr. 1242, 1247, 775; Pars.°3, 5, 8,

10, 20, supra).

21C: The Edwards interests, over the past thirty years,

have retired but few of their vessels from service, (Pars._

20, 3, 5; 8, 10, supra; e.g., Tr. 761, 768, 772-75, 779.)

As to. the multiple corporation issue:

, 22. Barge Transport Co., the original corporation in

the group. of corporations involved in this case, was or--

ganized and ‘has operated since 1939. The shareholders of

. this corporation at all times pertinent to this case were: /’

(1) Keith Edwards, plaintiff in Civil Action No.63-

H-95; the only ‘child of Mr. C. W. Edwards; Keith

Edwards was 40 years old when this case was tried.

ATE. 1371, 1384). :

’” (2) John E. Redding, plaintiff in Civil Action No.

. 63-H-96, who functions as thégeneral managér of the .

whole group of companies. (Tr. 789).

(3) Miss Pauline Lambert; Miss Lambert ceased to

be a shareholder on November 16, 1960, when the

corporation redeemed her stock; she is C. W. Edwards’

sister. (G. Exs. 9 and 10, pars. 10).

(4) Mrs. Letha C. Edwards, one of the plaintiffs in

| Civil Action No. 63-H-94, who is the wife- of Mr. C.

W. Edwards: (G. Exs. 9 and 10, pars. 10).

(5) Mrs. Evelyn Owens Edwards; Mrs: Edwards is

a sister-in‘law of C. W. Edwards. (D. Exs. 9 and 10, -

pars. 10). (G. Exs. 7 and 8 pars. 7). ae

23.. The officers of Barge Transport Co., at all times

here relevant were Keith Edwards, President, Charles: W.

. Edwards, Vice-President; and Jack Redding, Secretary

and Treasurer. The same three men formed the Board: of

Directors of the cosporation’ at alk times here pertinent.

baa Ex. 4, p. 23). !

24. The stock of Bay Sound Transportation Co., the

corporation organized August 1, 1959, at all times here -

pertinent, was. owned as follows:

| , Percentage ~° ae

Name of Of Stock :

Shareholder ~~» Owned +) Investment.

C. W. Edwards... 67.131... $ 772.00

J. E. Redding........ - Dial 60.00

Edwards’ Employees ... 27. 652 : 318.00 .

menremee tice Do pa neecieinpe Ee at ae ea Ry RELA

ARNE

LEVELS OLIN SATO LT OD

er ” 6

one : ee

- Name of . | of Stock

Shareholder. ~. | - Owned Investment —

CC. W. Edwards ....... 67.121 «© $772.00 |

3 i. §. EL Redding ....... +. ee) a 60.00 ©

: Edwards’ Employees _.. ..27.652 318.00

| J - $1,150.00

- Bay Sound Tratisportation Co. ‘and C. W. Edwards bis

options to acquire the stock owned by the employees . (and

Mr. Redding). (G. Exs. 7 & 8, Pars. Tr. 643-645, 844,

975, said P. Ex. 8L).

25. Riverside Transportation .Co., the ‘corporation or-

ganized August 1,- 1959, at “ times here pertinent, was

owned as follows: np) ar

Rivicide: “Transport and C. W. Edwards had options to

_ acquire the stock owned by the employees and Mr. Red-

ding. (G. Exs. 7 and 8, Pars. 9; Tr. 643-45, 844, 975,

1294-95; P- Ex. 8Q). . Ag

26. Christine Towing, ‘Co., the corporation eaiaee

ee July 9, 1957, at all times here pertinent, was owned as

follows:

Ss Name of ; of Stock |

_ Shareholder . Owned . Investment .

Keith Edwards ...:).... 98 - -$ 980.00 «

J. A. Hendricks (an Em-

ployee of Edwards Trans-. -

portation Co. and Barge

- Transport Co.) .-.... e : 10.00

S W. ‘Edwards DORe Tora Ee: | 10.00

gic viele genes ~— $1,000.00 -

G. Exs. 7 and 8, a a0; EY. 1294. 95: P. Bx, 8A).

Pas

o 47 . ef :

}

27. Coastal -Transportation Co., the corporation organ-

ized December 20, 1955, at all times Pertinent y was Owned |

~ as follows:

| o Percentage oo ae

Name of of Stock Pee Bes

Shareholder Owned _ Investment

J. E. Gough ......... , 50 $ 500.00

C. W. Edwards ~~... 21 210.00

Keith Edwards ....... 25 ee

J.E.Redding........ -4 * 40.00

~~ , * $1,000.00

' Coastal Tratispitation Co. and CW. Edwards hadeop-

tions to acquire the stock owned by Messrs. Redding and.

Gough. (G. Exs.'7 and 8, pars. 11; Tr. — 844, 975,

_ 1294-95; P. Ex. 8R).

28. Dixon ‘Bay Transportation. Co., and Murray Bay ’

Transportation Co., the corporations organized July 13,

1959, at all times here pertinent were owned as follows:

.. Percentage .

Name of | ~. of Stock

Shareholder ~ Owned Investment

G. W. Edwards ...... 415 -$ 477.25

Keith S. Edwards ...... 41.5 477.25

J. E. Redding a 3450 7

_ Edwards’ employees ... 14 ee 18100 :

$1,150.00:

(G. a 7 and 8, Pars. 42 and 13; Tr. siding, P. Exs.

‘8M and 8P).

29, Green Bay Transportation Co., the corporation or-

—

i>]

ia Lt hi Race ie Cal See aE AD

} .

48 2

ganized March 27, 1959, at all times here pertinent, was

» owned as follows: :

2 Bisiechens

Name of | + of Stock

nad Shareholder ~ - Owned _Investment

C. W. Edwards... 73 “"$ 730.00

Keith S. Edwards ___. 10 + 100.00

J. E. Redding ....... -3 “30.00 ,

Employees of. Edwards 0 ee

zi ‘ * Transportation Co. are

y _ and/or Barge Trans-

, port Co. oe Pe [4 140.00

—

$1,000.00

(G. Exs. 7 and 8, Pars. 14; Tr. 1294-95; P. Ex. 8N).

30. Lavaca Barge Co., the corporation organized De-

-cember 29, i958, at all times here pertinent, was owned |

as follows: a

> | Percentagt

Name of of Stock. |

Shareholder _ Owned » Investment

C.W.Edwards....°.. = 98-—.* ~——s $980.00

Letha C. Edwards ___ 1 10.00

_ Keith C. Edwards __.. l * 10.00.

- $1,000.00

(G. Exs. 7 and 8 Pars. 15; Tr. 1294-95; re Ex. 8GG).

31. Naptha Barge Co., the corporation organized De-

cember 31, 1958, at all times here pertinent was owned

. as follows: | ‘

Name of 7 of Stock |

| Shareholder Owned Invesynent

\ Keith S. Edwards _.. . 99.8 . $ 998.00

C. W. Edwards dl 1.00

J. A. Hendricks (an

employee of Edwards

Transportation Co. :

and Barge Transpo .

ne ee Ee ee l i 1.00

| $1,000.00

(G. Exs. 7 and 8, Pars. 16; Tr. 1294-95; P. Ex. 8KK).

32. Navidad Barge Co., the corporation organized De-

cember 29, 1958, at all times here pertinent was owned °

. as follows:

wif

Percentage

Name of of Stock

Shareholder Owned Investment

C. W. Edwards ss 98 $ 980.00

Letha C. Edwards 1 10.00

Kefth Edwards ..___- 1 10.00

7 $1,000.00

(G. Exs. 7 and 8, Pars..17; Tr. 1294-95; P. Ex. $MM).

33. Wolverine Barge Co., the. corporation organized

August 16, 1956, ‘at all times here pertinent, was owned

as follows: /

fae ee Percentage

Name of of _Stock

Shareholder Owned —_£Investment

J. E. Gough ......-.. 30 =~ $ 500.00 -

Keith Edwards ....... 49 490.00

C.W. Edwards... TE) —s«0,.00

$1,000.00

Wolverine Barge Co. a C. W. Edwards had an option

to acquire Mr. Gough’s stock in Wolverine Barge Co.

(G. Exs. 7 and 8, Pars. 18; Tr. 643-45, 844, 975, 1294-

95; P. Ex. 8XX).

34. Michigan Barge Co., Erie Barge Co., Huron Henke

Co., and Superior Barge Co., which corporations were all

organized March 25, .1958, at all times here pertinent,

were owned as follows: ;

- Percentage

Name of —of Stock

Shareholder Owned ~* Investment

J. E. Gough ......... - 40 $ 400.00

H. V. Huckaby (Mr. .

‘ Gough’s employee) . 5 50.00 .

T.-H. Bryant (Mr. :

_Gough’s employee) . 5 50.00

Louisiana Transporta- 7 ~

—?[— erro 50 ~ — §00.00

$1,000.00°

(G. Exs. 7 and 8, Pars. 19, 22; Tr. 1294-95; P. Exs. 8V,

8CC, 811 8SS).

5 As is indicated in paragraph 7, supra, the partners in Siatitees

Transportation Co., Ltd., are C. Ww. Edwards, 69.131%; Jack Red-

ding, 5.217%; employees of Edwards Transportation Co. and/or

Barge Transport Co., 27.652%. Louisiana Transportation Co. had

options to acquire from Messrs. Gough, Huckaby Bryant the

interests they owned in Michigan Barge Co., Erie Barge Co., Huron

Barge Co. and Superior Barge Co. (Tr. 844, 943-45, 975).

te =

35. Michigan Barge Co., Erie Barge Co., Huron Barge

Co., and Superior Barge Co., respectively, had options to.

acquire the stock owned in each corporation by Messrs.

Gough, Huckaby, and Bryant; C. W. Edwards also had ;

option to acquire the stock-in the foregoing four” cor- '

porations owned by Messrs. Gough, Huckaby and Bryant.

(Tr. 643-45, 844, 975). E

36. Ontario Barge Co., the corporation organized Sep-

tember 15, 1958, at all times hére pertinent, was owned

_as follows: aie oe

Percentage |

of Stock

Owned Investment

90 -$-900.00

5 50.00

—

. $1,000.00

\(G. Exs. 7 & 8, Pars. 23; Tr. 1294-95: P. Ex. 800). ¢

37, St. Clair Barge Co., the corporation organized Sep-

tember 15, 1958, at all times here pettinent was owned

as follows:

Percentage

Name of of Stock ;

Shareholder Owned Investment

C. W. Edwards ...... 90 — §$ 900.00

J. E. Redding ........ 5 50.00

..- Employees of Edwards

Transportation Co. _. 5 50.00 °

| $1,000.00.

(G. Exs. 7 & 8, Pars. 24; Tr. 1294-95; P. Ex. 8QQ).

4 '

ee te

ae 52

38. Ev. Barge Co., the corporation organized January

11, 1956, at all times a pertinent, was owned as

follows

; ee

Percentage »

‘Name of of Stock + eee.

Shareholder Owned | Investment

C. W Edwards........ 90 $ 900.00

J. GB. Redding ..’...... 5.5 : 55.00

Employees of Edwards

Transportation Co, .. 4.5 45.00

$1,000.00

(G. Exs. 7 rs 8, Pars. 25; Tr. 1294.95; P. Ex. 8Y).

39. Jack Bares Co., the corporation organized April 30,

1956, at all times here pertinent, was owned as follows:

: Percentage

Name of of Stock |

Shareholder Owned Investment

C. W Edwards........ 90 $ 900.00

J. E. Redding . es ~ 55.00

Employees of Edwards

Transportation Co. .. 4.5 45.00

$1,000.00

(G. Exs. 7 & 8, Pars. 26; Tr.’ 1294-95; P. Ex. 8EE).

40. Gulf Storage Co.,; the corporation organized Octo-

‘ber 20, 1955, at all times here pertinent, was owned as

‘ follows:

ae, Percentage

Name of — of Stock

Shareholder Owned : - Investment

C. W. Edwards 80 $ 880.00

J. E. Redding. .:.. |. ~ 10 _ 110.00

Employees of Edwards A

Transportation Co. . . 10 ; 110.00

. ‘$1,100.00

(G. Exs. 7 & 8, Pars. 27; Tr. 1294.95; P. Ex. 8AA).

41. Bay Sound Transportation Co. and Rivemide Trans-

portation Co.; the corporations described in paragraphs 26

and 27, supra, acquired the vessels C. T. & J. and Toni

Ann from the partnership Louisiana Transportation Co. at

or about the time they were organized. (G. Exs. 7 & 8,

Pars. 44, 46). The remaining eighteen. corporations (de-

scribed in pars. 28 through 42, supra) each acquired one

new vessel at or about the time they were organized. (See

Par. 10, supra).

_ 42. Each of the eighteen new vessels acquired by eight-

een corporations were acquired in essentially the same

fashion. First, the decision to construct the vessel was

made by Mr. C. W. Edwards, the Vice-President of the

original corporation, Barge Transport Co. (Tr. 1369-70);

this decision was made after counseling with Jack Red-

ding, the general manager of the entire fleet, Ev Meley,

the engineer for the entire fleet, Keith Edwards, Mr. Ed-~

wards’ son, and Mr. Amiel Stimrow, the CPA who was

the internal auditor and financial manager for all of

the business. (Tr. 1369-70, 987-89,°925, 480°M1, 227).

Once the decision to construct a vessel was made, an

order for the construction of the vessel was placed. While

the vessel was under construction, and about the time for

Te ee ee eee

delivery thereof, Mr. Edwards would call upon either the “

Texas National Bank or the National Bank of Commerce

in Houston to arrange for a loan to cover the full acquisi-

tion cost. (Tr. 1338-42, 1351-59). Most of the loans paid

the entire total cost of the construction and, in many in-

stances, provided additional funds for operating’ expenses. :

' (Ibid; See Par. 10, supra.*). Repayment of all the loans -

was guaranteed by Mr. C. W. Edwards. The banks, of

course, were relying on his guarantee as well as the se-

curity offered by the value of the vessel, which was gen-

erally covered #y a chattel mortgage. (Tr. 1352-60,

1367, 1338-45). Mr. Edwards never furnished the banks

(nor did the banks request), financial data on himself or

any of the eighteen corporations. (Tr. 1344-45, 1348,

1359-60). Mr. Edwards had had a long course dealing

with these two banks and was well known and trusted as

a responsible person. (Tr. 1273, 1360).

43. After the decision to construct each of the eighteen

new vessels was made; and the order therefore was placed

with the company doing the construction work, the cor- ©

poration to receive the vessel when completed, was organ-

ized. (Tr. 1123-27). Whatever property rights that existed

in the vessels under construction, were acquired by each

of the eighteen new corporations and when. and ‘as the -

vessels were completed and delivered, the corporations

took titles.* Then, the vessels were placed into sefvice in

the Edwards fleet. a me bitte

44. Of the twenty corporations otganized between’ 1955

and 1960, 14 each owned one barge, and 6 cach. owned

* For instance, the Barge Navidad cost\$41,000 (see Par. 10, supra)

but the loan on January 12, 1959, was $48,000. (Tr. 1356).

* Most ‘of the vessels were delivered from a few days to a Aew

weeks after the owner-corporation was organized. (See Par. 10, supra).

one boat. (G. Exs. 7 & 8, Pars. 37, 38, 44, 46, 48, 49, 50,

52, 54, 56, 58, 60, 62, 63, 65; 67, 69, 71, .73, 75,76

and 77). None of the barge corporation had any employ-

ees. The only employees of the boat corporation other

than members of the crews, are as follow: |

ye set ¥

OLN LUNN OES OAR

3 :

Name of Name of corporation-

employee | | employer | ,

Keith Edwards ................ Christine Towing Co. F

J. A. Hendricks j

(maintenance) ............. Christine Towing Co.

Vera McNeilly one |

(bookkeeper) .. ... Green Bay Transportation

(Tr. 449-457; P. Ex. 4, pp. 24-42).

Deemer ree i

Messrs. Edwards ‘and Hendricks were also employees off

either Barge Transport Co. or Edwards Transportation Co. ~' . 7

and they drew the bulk*of their pay from these organiza- ~

tions. (P. Ex. 4, pp. 39-42). The administrative personnel i

for the organization were employed by either Edwards

Transportation Co. or. Barge Trarsport Co. (Tr. 459-75).

45. The operation of Edwards Transportation Co. and

Barge Transport Co., the several partnerships that owned’

vessels (Wilkins Barge Line, Louisiana Transportation

Co., Buffalo Bayou Transportation Co., Barge Delta Joint > |

Venture, and Sterling Barge Line), and the twenty vessel-

owning corporations was essentially as follows: a ;

(a) All of.the companies utilized the same office ad- -

~ dress. (G. Exs. 7 & 8, Pars. 34).

(b) Edwards Transportation Co. and Barge Transport

Co. had’ telephone listings and were the only two com-

_ panies known (other than Wilkins Barge Line for a time)

to the general public; these two companies obtained all.

business for the éntire group of Edwards’ companies. oy

(G. Exs. 7 & 8, Pars. 33; Tr. 479-480, 765-67, 852).

~ port Co. obtained a contract for the transportation’ of |

“petroleum products, Mr. Redding was given the job of

seeing that appropriate vessels were assigned to the job.

Mr. Redding, of course, knew the capacity and- capability

of each of the vessels and would assign the appropriate

number of barges and boats to the tasks. The company

., maintained a dispatching office in New Orleans and an-—

othér in Houston, and contact was made with the boat cap- -

~ “tain to advise him what barges to pick up, where he should

go,~and what he should.do. The dispatchers in New |

Orleans and Houston and Mr. Redding were all employees

of Edwards Transportation Co. and/or Barge Transport

Co. (Tr. 111-114, 93, .791, 852-54).

(d) In those circumstances where the Edwards fleet

had no vessels available to perform a contract, outsiders

were: contacted and a sub-contract was made with these

outsiders to either furnish one or two barges or a tugboat.

or a whole tow, as necessary,-for the job at hand. However,

in dispatching the vessels to the job sites, preference was

always given to vessels owned in the Edwards fleet, and.

about 90 percent of the: work that was obtained through

Edwards Transportation Co. and Barge ‘Transport Co. was

done by the Edwards fleet itself. \N€Tr. 479-80, 852-56).

(e) Of course, therg were no formal negotiations or

contracts let between Edwards Transportation .Co. and/or

Barge Transport Co. and the five’ partnerships and twenty

vessel-owning corporations. Instead, the vessels were dis-

patched to perform the work, much like taxicabs. are dis-

’

}

| 37 .

| }

. patched, and an intercompany billing process followed. &

Those corporations and partnerships which owned barges f

ie -<@etermine which boat corporations and partnerships used . -

~ -their barges during the Particular month just past. Records.

covering this were maintained by either Edwards Trans-

portation Co. or Barge: Transport Co. Amounts to be col-

lected from the boat corporations and partnership by all of

the various barge corporations and partnerships were re-

corded on the books of the various barge corporations and

partnerships as “accounts receivable”. The amounts were

then entered into the books of account of the ‘boat cor-

porations and partnerships as “accounts payable”. Then

the boat companies calculated the amounts “owed” them

by either Edwards Transportation Co. or Barge Transpétt

Co. for transportation services performed during the pre- — ~

ceding month. Such amounts were recorded on the boat-

companies’ books ef account as “accounts , receivable”.

(Tr. 458-473,°854-59), ~ . -

(f) Barge Transport Co. and Edwards ‘Tkanspiiriatitn

Co. recorded the boat companies’ charges as “accounts

payable”. Barge Transport Co. and/or Edwards Trans-

portation Co. would then bill the person for whoni the

services were performed, such as Texaco, Inc., Gulf -Re-

fining Co., etc. When the money covering the invoices was

received by Edwards Transportation Co. and/or Barge

Transport Co., they drew checks on their respective bank

accounts to pay. the boat companies; the boat companies

deposited the checks arid drew checks of their own in

favor of the barge companies. All of this bookkeeping

work was accomplished in one office by five or six book-

keepers who’ ‘were -eniployees of Edwards Transportation

Co. and/or Barge Transport Co. Books of account were

- maintained. for each of the Sica | new corporations and,

— %

li ne e%

fe 58

of course, bank accounts were eee (Tr: 458-473, ;

854-59).

(g) When ‘a particular veut ks repairs, the cap-

tain in control would proceed to either Edwards Trans- _

portation Co.’s shipyard in southern Louisiana, or to the

closest shipyard. Contact would then be made with the

Barge Transport Co. and/or Edwards Transportation

Co.’s office in Houston or New Orleans for instructions. |

(Tr. 117- 118). ‘When the work was ‘done, the bill was’ .

generally submitted by the company performing the: work °

to Edwards ‘Transportation .Co.; the bill: would be filtered”

into the hands of’ whichever organization owned the

véssel on which the work was done, and’,an appropriate

check was drawn to pay the debt. (Tr. 635-37, 723-24,

765-67 ). All of the tow boat crews were hired by the

organization’s~ Persone, manager in Néw Orleans. (Tr.

473-75, 663). <

(h) Both Edwards ecient Co. ‘oak Barge +

Transport Co. paid the boat companies slightly less than

the: amounts they billed their customers. This generally

amounted to a fraction of a cent per barrel of petroleam

products moved. Fhus, Edwards Transportation Co. and

; . Barge ‘Transport“€o. had revenues not only from the op-

erations of their own barges and boats, but also from this

“service charge” it made to the other partnerships and

corporations in the group’ when their vessels were dis-

patched. (Tr. 62, 527). 7

46. All of the key personnel in the aware 4 organiza-

> tion’ were informed of and aware of the potential tax ad-

vantage that could be accomplished by spreading income

_-from one business over more than. one corporation. They

_were aware that, during the late 1950's, the federal income

te ; -

a ae

= Bx. 18).

tam Bek Bek Bok Ue tee tye tee Wee t

organized between 1955 and 1960) pertinent to the tax

advantages to be achieved through the use of several

corporations rather than one corporation. (Tr. 439-449,

480-500, 868). As a matter’ of fact, Mr. Sumrow, the

C. P. A., made projections of income and expense ‘to

ascertain the cash flow that would be produced-for several

of the newly constructed vessels. (Tr. 439-449, 480-481,

850). In making these projection’ studies, a deduction for.

income tax was always prédicated upon the tax rate of.

30 percent: (not 52 percent) on the first $25,000 of tax-

able income for each vessel. (Tr. 444, 448, 850).

Although the officials of the Edwards organization al-

legedly had formal meetings to discuss and decide upon the ~

use of multiple corporations in their operations, no minutes

or writings of any kind were ever made to reflect what,

if anything, happened. The. only real evidence supporting

_ plaintiffs’ testimony is one letter written by Edwards’ ad-

miralty attorneys during the adminstrative processing of

this case by the Internal Revenue Service. (Tr. 255, 257-

«61, 312, 584, 897-98, 1632; G. Ex. 1 for identification G.

a ‘

a -

—

48. Mr. Charles Edwards is the person in the organiza-

tion who made the ultimate decision of whether or not

multiple corporations would be utilized. This would be

done after considering the recommendations of the other

key personnel. (Tr. 212-214, 1369-70). Mr. Edwards

testified that he had not considered tax matters in deciding

to incorporate each vessel constructed during the period

of 1955 through 1960 and had not discussed such mat-

ters with tax counselors. (Tr. 55-57, 238, 239, 242-243).

The. federal taxation specialist employed by a national

certified public accounting firm in Houston, Texas in

fact was sought out by Mr. Edwards and from him Mr.

Edwards and other of his employees obtained counseling ~

contemporaneously with the formation of the first of the

twenty corporations as_to the tax advantage of the use of

multiple corporations. The counseling was to the effect

that (1) there was a maximum tax Saving of $5,500 per

annum to be achieved for each additional corporation that

was utilized in the Edwards operation, and (2) there was

an exemption from accumulated earnings tax of $60,000

which was allowed to each corporation. The counseling

was to the effect that if Edwards used twenty-one cor-

porations in his fleet operation instead of one corporation,

there was a maximum tax savings that could be achieved

of $110,000 per annum. (Tr. 1612-1617).

49. Mr. Charles Edwards, who is aging and infirm, in

recent years and at the trial of this case, manifested a

consistent failing of his capacity to recollect recent occur-

rences. He is able to vividly recount transactions that

occurred during the 1930’s and 1940's, but is unable to

clearly recall transactions that occurred during the 1950's.

(Tr. 75, 83, 84, 96, 97, 98, 99, 100, 101, 103, 104, 105-

106, 134, 137). |

~~ . P whe

; « s — 4

61°

50. Mr. Keith Edwards was not at all concerned during

the 1950’s whether the next.vessel"to be constructed (or

any vessels) were placed in one of the’ existing partnerships

or in a new corporation. As a matter of fact, he did not

keep track of who owned the new vessels. He was con- .

cerned primarily with the operation of the ‘vores, (Tr.

1369-70). j

51. Mr. Jack Redding, the general. manager of ‘the

operation, was never really in.a position to dictate policies:

~ He discussed business matters and recommended caurses of

action, but Mr. Edwards himself was the decisive person.

(Tr. 867-868, 925, 1369-70).

52. Mr. Amiel Sumrow, during the time when the first

one or two (of the twenty corporations involved) were ©

organized, expresséd his‘concern to Charles Edwards and

Redding about the possible tax problems that would accrue

as a result of the use of the numerous corporations. Mr.

Sumrow read the accounting periodicals and studied tax

services, and cautioned Mr. Edwards that a business pur- -

pose was necessary. (Tr. 486, 488, 500).

53. Of all the persons in the Edwards organization, Mr.

Ev Meley, Jr., the partner in Louisiana Transportation Co.,

displayed the most concern about his possible liability to.

the public as a result of liability. During the middle 1950's,

he was in charge of handling. the damage claims against

Edwards Transportation Co. et al. In talking to lawyers in

New Orleans, he was advised of his possible exposure as

a partner for claims against the partnership. He was coun-

seled to the effect that the corporate device would limit

his liability to the investment in. the corporation, and that

__ the most conservative of all positions was to incorporate.

each vessel. Nothing was ever done to reduce Mr. Meley’s |

.. . . * /

exposure as a partner, for he remains a partner in Louisi-

ana Transportation Company (now .called Oil -Cities

Transportatiort Co.). As a matter of fact, this partnership

owns half of the stock in several of the corporations (see,

Par. 34, supra, and, of course, Mr. Meley himself owns -

_stock in other corporations, all of which would. be subject

to seizure by his creditors. (Tr. 906-907). |. -f

54. Through :the years going back to the 1930's, Mr.

Charles Edwards’-Houston admiralty attorney counselled

with him in respect to the limitation of liability that would

be afforded through the use of the corporate device. (Tr:

55, 1137-38). However, the beginning date for the

‘separate corporations began in 1955. The case of Rogers

v. Missouri Pacific Railroad Co., 352 U.S. 500, 506, was

decided on February 25, 1957. Mr. Eastham’s letter with

reference to spreading liability which was referred to but

not offered in evidence was dated December 7, 1961.

55. The Edwards companies have always carried insur-

ance on cargo being transported and when damage thereto .

occurred, adjustments were always made directly by the

insurance company with the cargo owner. (G. Exs. 9 &

10, Pars. 2(O)). Insurance for personal injury and

property damage was carried in some instances but

because of the cost, some of the companies carried no

such insurance. The following tabulation reflects by year

all ‘of the personal ‘injury and property damage claims

paid by all of the various companies respecting the Ed-

wards vessels for personal injury and property damage:

/ °

63 °

, Fiscal ¥ear Ending During

— 1958 ~~ 1959 1960

Edwards Transportation Co. $38,907 $12,119. $44,271

Barge Transport Co... ... 3,180 7,414 5,371

Bay Sound Transportation Co. .... et 40

Christine Towing Co. ..... J > 1519 197

Dixon Bay Transportation Co. _ fe 14

Green Bay Transportation Co... __. 364 |

Murray Bay TransportationCo. _.. ae 7027

Riverside Transportation Co. .... 294 16,433

Wilkins Barge Line ...... ~ 1,500 ages 1,573

Louisiana Transportation Co. 29,540 24,627. 16,843

Sterling Barge Line ... 286 250 25

(G. Exs. 9 & 10, Pars. 2(O); P. Ex. 4, pp, 11-14).

56. Over the years all of the companies and vessels have

had claims for property damage and personal injury made

against them. Some of the claims, of course, were: valid

and some spurious. Most claims were made with respect

to operation of boats, not barges. The experience of the

Edwards Transportation Co. partnership is typical; through

30 years of operation. The following are claims (whether

or not valid) made with respect to barges:

ye se

Total Amount

Barge of Claims

NN aaa base ah 8b eae None

aerate tae are ee None

oS Se On ee ee None

SS eae fers eee ee $ 2,500

George BE. ww eee eee eee 5,200

OS Saree errr rrr er ret 10,000

Hiram King... ee None

L. G. Cobb SS Ah cue None |

Peggy Coyle ......--- ee a. 49,000 -

Sy dens she w ado 9:8 OE FE ee None

Petroleum iw... -- ee eee ... ° 88,394

Salvador as Oxon te aa EAE Se ras None

ee ee se eras None

ae Ape rere re eee Ties f None

W. J. Wyatt | wwe eee eee None

(G. Exs. 9 & 10, Pars. 2(O); P. Ex. 4, pp. 7 & 9). The

experience as to claims made (whether or not valid),

~ against the other barge-owning organizations in the Ed-

wards fleet is as follows:

dina Si Se: ile

o 65

Total Amount

of Claims—

Inception to

Company . Date of Trial

Nn Ne $2,500

Buffalo Bayou partnership (2 barges) ...__.. 2,500

Barge Transport Co. (5 barges) .......... 2,500*

Barge Delta Joint Venture. ................. None

Ci ee None

Coastal Transportation Co. ........... None

IS oY ' None

WE ES ec a esas) tea oan . eis. None

Naptha Barge Co. ....... FP FEN er el ee None ,

.Navidad Barge Co.: ............. ate . None

Wolverine Barge Co. ...-........... Ae ~ None-

Michigan BargeCo........................ ~ None’,

Ne 6h i iis os oe ,., Ome

dF & i ae ...- None

I I ore a eS ss None

St. Clair BargeCo. ...... peal ich ya 5 None ©

navets BergeCo. |. eee s Aten at None

* 1950 to date of trial in 1966.

As to the organization expense issue:

57. Incident to the formation of 14 of the 20 new cor-

porations ( between 1955 and 1960), fees were paid to

Edwards Transportation Co.’s attorneys covering fees and

costs incident to preparing and filing the various corpora-

Oe Eee RET See

tions’ articles of incorporation and holding the: first meet- +

‘ing of shareholders. These organizational costs were all |

paid to the same’ law firm in amounts as follows:

Cp ‘sued ‘g FL ‘SXZ ‘D>

“ce

6e:

“ec

“ce

“

. 6

“ce

“ec

“ce

“ec

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OY} Ul BOUdIOJOY

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LL'997

L9°99Z

6L°S97

vS°997

vS'99

6L°S97Z

LS'997

TS'SIE

LS'997

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18°997

T8°997¢

€6'C9T

76'79T$

“preg junowry

acne she weee ee 6 Lieder ate crete os ‘0D osieg meyD "4S

2.5 <= didnt ite wale,

Teen e rT re eT sige eteeeecees sees’: egy Bauer sousdng

ee kh ae hae Eee oe eee ss rt 's* S97) aSreg uomnpy

ae ee ae ee eRe a 6 6 e'h a eee $ aa Pear Cy ae ae "0D osieg fa) os |

ana eae eee we oe 1 4 weseetersce ss: oy OBrpe UBS

re rey eee peep b ee tea sees ‘02 o81eg peplAen

vip eis os peers eters sere sss cosy oBueg eden

Se ea igcaciw Age > ee pene. ‘OD o81eg voRAR’]

See sete eee RR a eae 0D uoneyodsues L Aeg uselt)

De Se I ea an ag We oe 0D uoneodsuvs L keg Avni

Sak Win aNe bs sche oat Ae ao ‘0-2 uoneyodsuesy, Aeg uoxIq

re Wt Date ales ‘0D uo1jejJodsue I], Oprmssoany

_ 0D uoneyodsuesy, punog Aeg

oy uoneiodiog jo owen

. 67

58. On the first income tax return filed by the fourteen

corporations mentioned in the preceding paragraph, no

reference was made to the fact that the amounts paid were

organizational costs. Neither on nor attached to the .re-

turns were there statements to the effect that the fourteen

corporations elected to amortize the organizational costs.

(P. Exs. 8). The amounts mentioned in the preceding

' paragraph were deducted along with other amounts by

each of the fourteen corporations on their respective first

income ‘tax réturns under the classification “Legal and

Professional fees.” (Ibid.) a

As to the travel and entertainment expense issue:

59. During 1958, plaintiff Charles Edwards, at a down- —

town Houston hotel, cashed thirty-five $300 counter checks :

-drawn on his ‘personal bank. These checks were cashed

regularly about every ten days or two weeks. Of the ag-

Sregate currency received ($10,500) Mr. Edwards con-

tends that he redeposited $1,000. (Ex. K-1 to-P. Ex. '5 ).

same downtown Houston hotel) cashed forty $300 coun-

ter checks drawn on his personal bank account, one $300

counter.check in New Iberia, Louisiana, and-one $800

counter check at the downtown Houston. hotel. These

checks were. cashed regularly every week to tea days

throughout'the year. (Ex..K-2 to P.-Ex. -

61. Neither Mr. Charles Edwards nor any other person

’ maintained any records whatsoever to substantiate whether

the $9,500 in 1958 (Par. 59, supra.) or the $13,100 in

1959 (Par. 60, supra.) were expended for travel and/or

entertainment. (G. Ex. 18 (Edwards subpoena, itefff ie i a

327, 329-31)). | Cosme:

68-

. As to the government bond interest issue:

. 62. During December 1946, the’ plaintiff Keith S. Ed- |

wards purchased six: United States Savings Bonds, Series

F, at a cost of $7,400 each, or a total of $44,400; these

- bonds had maturity values of $10,000 each, or an aggre-

gate maturity value of $60,000 when is matured. (G.

Exs. 7 & 8, Pars. 80.) |

63. Plaintiff Keifi-S, Edwards during January 1947,

purchased six additional Series F United States Savings -

‘Bonds, three at a cost_of $7,400 each, and three at a cost -

of $740 each, or a total cost of $24,420. These bonds had

maturity values of respectively three at $10,000 and three

at $1,000, or a total of f $33, 000. ue Exs: 7 & 8, Pars.

81.)

_ 64. The bonds described in the second preceding para-

graph, purchased during December 1946, matured during

_ December 1958, an@the bonds mentioned in the preceding

paragraph, purchased during January 1947, matured dur-

ing January of 1959, The United States had not extended

the maturity date on the Series F Bonds described in this ,

paragraph, and the maturity: values thereof were payable

when and as the bonds matured, and would have been

paid to plaintiff Keith Edwards had he presented them for

ie ocr (G. Exs.’7 & 8, Pars. 82.)

~ 65. Some time during 1964, plaintiff Keith Edwards

presented all of the Series F Bonds and collected the ag-

gregate maturity value of $93,000. (G. Exs. 7 & 8, Pars.

82.) .

66.. The Commissioner of Internal Revenue caused the

various tax returns of all plaintiffs involved in this suit ~~

to be examined and as a result of such examination, ad-

ditional assessments were made, paid, and in due course

as ot wl pm ay

after claims for refund were filed, these suits ‘demanding

refunds were filed. Because the plaintiff Keith Edwards

has conceded that the government is correct as to this @d-

ditional assessment, no further discussion or reference to

_ ‘this part of the case need be further mentioned.

> °

case, the rulings are as follows:

(1) As to the admissibility of the letter of John’O’Far:

rell, dated July 15, 1965. The same is admitted upon

authority of ‘Brooks v. Texas General Ind. Co., 251 F.2d" -

_ 15 (C.C.A. 5th 1958). This letter was hearsay, not sworn

to and the person writing it was not subjected to cross-

examination and it was cumulative of other expert witness

offered by the Plaintiffs. The weight to be given such

testimony is, of course, up to the trier of facts. The Court.

in considering the latter ‘is, in accord with the following '

from the case of Jones v. N. V. Nederlandsch-A meri-

kaansche Stoomvaart Maatshappij, 374 F.2d 189, at 1 90,

when the United States Court of Appeals for the Third

Circuit held: : is

“. .. For the opinion, of an expert even. if uncontra-

dicted is not conclusive and a jury is not required to

accept it. Such testimony | must pass through the

Screen of the jury’s judgment of credibility. Sartor .

v. Arkansas Natural Gas Corp., 321 U. S. 620, 627, .

64 S.Ct. 724, 88 L.Ed. 967 (1944); Rhoades, In-

corporated v. United Air Lines, Inc., 340 F.2d 481

(3 Cir. 1965); Wooley v. Great Atlantic & Pacific

Tea Company, 281 F.2d 78 (3 Cir. 1960).”.° 27 -.

’ Passing now to’ the “question of equitable estoppel

claimed by Plaintiff as the result of a conversation between

Plaintiff C. W. Edwards and government employees Walt

- Williams and Steven Condon. At most, this conversation

was tentative and only applied to one vessel, to wit: Letha

C.. The casé of Bornstein v. The United States [65-1

USTC 9421], 345 F.2d 558 is in point and controlling.

In that case-at page 562, the ‘tout of Claims wrote as.

follows: ’

(2) “... It is a settled piebinle of law that the

United States is not bound by the unauthorized acts

of its agents, that it-is not estopped to assert the lack

of authority as a defense, and that persons dealing

'. with an agent of the government must take notice

of the limitations of his authority. Federal Crop In-

surance Corp. v. Merrill, 332 U.S. 380, 68 S.Ct. 1;,

,92- L.Ed. 10 (1947); Utah Power & Light Co. v.

United-States, 243 U.S. 389, 37 S.Ct. 387, 61 L.Ed.

791 (1917); Byrne Organization, Inc. v. United

' States, 287 F.2d 582,.152 Ct.Cl. 578 (1961). An.

agent cloaked only with apparent authority cannot

- bind the United States for, as the court stated in

. .United\States v. Willis, 164 F.2d 453, 455 (4th Cir.

1947)— ss 3 4 +

sé

‘* * * He who deals with an + seent of the goverti-

- ment must look to his authority, which will not be

_ presumed but must be established:~-He-cannot. rely”.

upon the. scope of dealing or apparent Semone | as in

the case of a private agent’.”

All other motions not heretofore specifically ruled on

are enced denied and overruled.

bepisciedion Issue

* Coming now to the first question for decision—that of

the matter of the depreciation of the tugs and barges.

- ’ Teas i

~ Plaintiffs claim that both the tugs and the barges have a

useful life of only 7 years and that at the tnd of that 7~ -

year period, they have no salvage value. Defendant as-_

serts that the tugs have a‘useful life of 35 years with a

10% salvage value and the barges have a useful ‘life of

25 years, and a 10% Salvage value at the end of. that

25 year period. A large amount of the more than 1,800 |

pages of testimony was devoted to this question of de-

preciation. The question of the: regulation of the depre-

ciation is covered in the Appendix .A attached’ to this.

Opinion. Judge ‘Connally in the recent case of Shell -Pipe -

Line Corporation v. United States, 267 F.Supp. 1014, at

1018, correctly discusses depreciation, and: in doing so

‘

sets forth the factors to be considered in making the de-

termination. He wrote as follows:

_ “** * A reasonable allowance for the exhaustion,

‘Wear, tear and obsolescence of the property used by

the taxpayer in his trade or business for the produc-

‘tion of income shall be allowed. The. allowance is

that amount which should be set aside for the year in -

question with a reasonably consistent plan whereby .

the aggregate of the amounts set aside, plus the sal-

vage value, will -at the end of the. estimated useful

_ life of. the depreciable Property equal the cost or

other ,basis thereof. The estimated useful life of an

asSet is not necessarily the actual life, but it-is the

period over which the asset may reasonably be ex-

pected to be useful in the. taxpayer's trade or busi-

ness. This period is determined by reference to the

taxpayer's experience ‘with similar property; (Em-

phasis added.) and some of the factors to be con-

sidered are (a) wear and tear, decay and decline

- from natural causes, (b) the normal progress of the

art, economic changes, inventions and current de-

velopments within the industry and the taxpayer’s

eure y 7 ed

‘trade or business (c) the taxpayer’s policy as to re-

pairs, renewals and replacements.”

The Plaintff taxpayer has the burden of proof ) estab-

lish by the clear preponderance of the ‘evidence his claim.

This he failed to do. However, I am of the Opinion con-

sidering the reasonable reliable material facts, the appli-

cable law and the pertinent regulations that the reasonable,

proper and just allowance for — in this case

_ is as follows:

I find that the useful life’ of the tugs Athos, Porthos,

Aramis and D’Artagnan is {5 years with a 10% salvage

value t the end of such 15-year period; the balance of

the tugs I hold have a useful life of 20 years with a 10%

salvage value at the end of such 20-year period.

All of the barges involved in this case I conclude have

_a useful life of 15 years.

Multiple Corporation Issue

Turning now to the question of separate or multiple

corporations. The question is whether the main or major

purpose of the Plaintiffs in incorporating a large’ number

of vessels, 20 of them involving only one vessel, was to

avoid the payment of surtaxes. The Plaintiffs strenuously

assert that spreading liability was the main reasdM%for the

many separate corporations, with other purposes for be- —

ing in a preferable position in the event that they had

labor trouble and also it would be much easier to transfer

the stock in a corpofation if such was necessary by reason

of sales or inheritance, and too, they claimed that it was

the banker’s wish that separate corporations be formed.

. The separate corporations resulted in a savings of about

$110,000.00 per year. Mr. Edwards was*extremely un-

73 rA

happy over the large amount that he had to pay of his

personal income tax. He was resentful of that fact. At

the time that he began formation of separate corporations,

it was before the Rogers case, supra. As to whether the

main or major purpose and reason for the separate cor-

porations was for tax savings or some other reason or

reasons is purely a question of fact. In the case of Bonne-

ville Locks v. United States of America [65-1- USTC

{ 9330], 343 F.2d 790, at 791, the United States Court of

Appeals for the Ninth Circuit, on March 23, 1965, held:

“* * * A determination of what is the principal

purpose of the acquisition of a corporation is a ques-

tion of fact. Kessmar Constr. Co. v. Commissioner

[64-2 USTC 4 9741}, 336 F.2d 865 (9th Cir. 1964);

Shaw Constr. Co. v. Commissioner [64-1 USTC

49101), 323 F.2d 316 (9th Cir. 1963); Hawaiian

Trust Co. v. United States [61-1 USTC { 9481], 291

F.2d 761 (9th Cir: 1961).”

Kessmar Construction Co. v. Commissioner ‘of Internal

Revenue, supra, was a case in whigh sixteen corporations

had the same shareholders, and the tax court held that the

principal purpose of the stockholders im forming these 87

teen corporations i of one was in evasion or avoid- o.

ance of tax through the securing of tax benefits which the

stockholders would otherwise > not have enjoyed. The bur-

den of proof that the Commissioner was in error was upon

the Plaintiffs and they have not carried their burden. In the

case Of Hiawatha Home Builders, Inc. y. Commissioner of -

Internal Revenue [CCH Dec. 24884], 36 Tax Court of

United States Reports, at 498, the court held:

“* * * The second issue is whether the petitioner

has established ‘by the clear preponderance of the

= :

/ evidence’ that a major purpose of the transfer men-

/ tioned and described in the first issue, supra, was not

to secure the surtax exemption or the minimum ex-

cess profits credit. The issue is one of fact, to be de-

termined upon a consideration of all the circum-

- stances relevant to the transfer. Truck Terminals,

- Inc. (CCH Dec. 24,044], 33 T. C. 876, 884; Sno-

Frost, Inc. {CCH Dec. 23,474], 31 T. C. 1058, 1062,

‘acq. 1959-4C. B. 7; Income Tax Regs., Sec. 1.1551-

1 (e). (Emphasis added.)

The interdicted purpose of securing the surtax

exemption need not be the sole or principal purpose

of the transfer of property. Rather, the benefit of

the exemption is to be disallowed if such purpose was

a major purpose. Truck Terminals, Inc., supra. Nor

_will a mere showing of a business need as actuating

“the transfer suffice to satisfy a taxpayer’s burden of

proof under section 1551. In a word, the taxpayer has

the burden of establishing a negative proposition, i.e.,

that the securing of the surtax exemption or the mini-

mum excess profits credit was not a major purpose

of the transfer.”

. The history and listing of the claims against the cor-

porations and partnerships and their respective vessels for

the years herein involved are significant when. compared

with the amount sought to be saved by the taxpayers. See:

Paragraphs 55 and 56 on pages 42 and 43 of this Memo-

randum Opinion. :

Plaintiffs have the heavy burden under the settled law

of proving that the organizing of the 21 corporations was

not for the purpose of securing surtax exemptions. If

one purpose was to obtain such surtax exemption, then

Plaintiffs have failed to discharge their burden. On this

question of tax avoidance I hold against the Plaintiffs and

in favor of the Government.

Amortization

Coming now to the question of whether the corporate

Plaintiffs are not entitled to amortize their organizational

expenditures. Several of the corporations’ expended funds —

for legal costs in connection with their organization.’

On the federal tax returns filed by each of the corpora-

tions they deducted the full amount of the organizational

costs as “legal and professional fees” treating them as de-

ductible under Section 162. ;

The Government takes the position that none of these

amounts are deductible as legal and professional fees, i.e.,

under Section 162 as ordinary and necessary business ex-

penses. Taxpayers now agree that Section 162 is inap-

plicable...Both parties agree that if they are deductible

at all, such expenditures are deductible only under Sec-

tion 248"' of the Internal Revenue Code. Appendix A,

Page 2, infra.

~- .

® The names of the corporations involved in this’ issue are set: out

in Footnote 3, supra. ;.

1°The amounts expended are set out in Statement, supra, Pars.

57 & 58.

11 Section 248 was enacted in the 1954 Internal Revenue Code to

.provide a benefit to yers; there was no corresponding provision

in prior internal sévenue law. Under the law prior to 1954, organiza-

tional costs wére required to be capitalized and no deduction was

ever allowed {therefor on the theory that the corporation had an

indefinite life; or if it had a definite life, it was subject to renewal

an indefinite number of times. The organizational costs.were deduct-

ible only when the corporation was terminated and its franchise

oabandoned. Malta Temple Association v. Commissioner [CCH Dec.

5133], 16 B. T. A. 409 (1929); Shellabarger Grain Products Co. v.

Commissioner [44-2 ustc J 9527], 146 F.2d 177 (C..A.7th, 1944);

Koppers Co. v. United States [60-2 ustc { 9505], 278 F.2d 946 (Ct.

Cl. 1960). }

The Government takes the position that Section 248

requires an express election and failure to make the elec-

tion in the form and manner proscribed, precludes ap-

plicability of Section 248. (Emphasis added. ) :

» With respect to the time for the- scope of the election —

required by Section 248, Section 248(c), Appendix A,

infra, Page 3 provides in part as follows:

“The election provided by subsection (a) may ‘be

made for any taxable year beginning after Decem-

ber 31, 1953, but only if made not later than the

time prescribed by law for filing extensions thereof) .”

(Emphasis added.)

For Regulations pertinent to the time and manner of.

making an election see (Section 1.248-1(c)), Appendix

A, Page 8, infra. bt oha 2s

All of the plaintiffs admittedly failed to cémply..with

Section 248 and the foregoing regulation. They made no

reference in any way to an election to avail themselves of

Section 248. The Regulations under Section 248 are ob-

viously valid, because’ they are reasonable, consistent with

the statute, ard°clearly with the Congressional grant of

power. See, e.g., Ackerman v. United States [63-2 USTC

q 9542], 318 F.2d 402, 404 (C.A. 10th); Darby v. Wise-

man [63-2 USTC 4 12,186], 323 F.2d 792 (C.A. 10th,

1960).

the doctrine of election applies where, as here, a ‘tax-

payer is given a choice of either taking one or two courses

of action; once there has been ‘a clear exercise of the

choice as shown by some act or failure to act, the election

is binding on the taxpayer. An oversight, an error of

ct»

t ¢

judgment, or unawareness of tax consequences does not

lessen the binding character of the election. See Mertens,

Federal Income ‘Taxation, Sections 60.19-60.20 (1959);

Ross, v. Commissioner [48-2 USTC 4 9341], 169 F.2d

>» 483, 493 (C.A. Ist 1948); Alabama Pipe Co. v. Com-

Thorrez v. Commissioner [CCH .Dec. 23,301],*

655, 668 (1958) aff'd [60-1 USTC q 11,920], 2

945 (C.A. 6th). i 2 :

‘The corporate’ ‘Plaintiffs in the instant case made

binding elections not to claim the benefits of Section 248

. missioner [CCH Dec. 20,619], 23 T.C. 95, 98 43 :

F.2d

Suasiassions expenses, therefore, fall under the general

; they must be capitalized and recovered upon ulti-

sat abandonment of the corporate franchises.’*

Travel and Entertainment. Expenses

Reaching the last question to be decided on the-merits,

to wit: That of the alleged travel and entertainment ex-

_ penses claimed by Mr. Charles W. Edwards.

In the case of W. Horace Williams, Sr., and Viola Bloch

E&.:

by not complying with the statute and Regulations. Their

COP REO RN,

Williams v. United States of America, United States Court |~

of Appeals, Fifth Circuit, June 18, 1957, [57-2 USTC

q 9759] 245 F.2d 559, at 560, now Chief Judge John R.

' Brown, in a case in which a taxpayer sought a refund for

income tax for entertainment expenses, wrote:

“* * * That the.trier, whether District Court or

Tax Court, might have considerable latitude in mak-

ing estimates of amounts probably spent in the light

of accepted practice amongst law-abiding business-

12 See the preceding footnote. :

| oe

men of moral standing considering the nature and

kind of records which might reasonably be kept for

such expenditures, Cohan v. Commissioner, 2 Cit.,

[2 USTC 4 489] 39 F.2d 540, 543, certainly does not”

requife that such latitude be employed. The District

Court may not be compelled to guess, or estimate. It

may not be compelled to estimate even though such -

an estimate, if made, might have been affirmed. For,

.the basic requirement is that there be sufficient evi-

dence to satisfy the trier that at least the amount al-_

lowed in the estimate was in fact spent or incurred for

the stated “purpose. Until the trier has that assurance

from the record, relief to the: taxpayer would .be un-

guided largesse.” ;

In the late case of Herbert v. Commissioner of Internal

Revenue [67-1 USTC 4 9421], 377 F.2d 65, at 69, the

court held: — ys, :

_ “& * & The general rule is that the burden of proof

is on the Commissioner to establish that the taxpayer

received income. Hawever, the. Commissioner’s de-

- termination of a deficiency satisfies such burden since »

the determination’made by the Commissioner is pre-

sumptively correct. The taxpayer then has the burden

of overcoming this presumption by a preponderance

of the evidence. American Pipe and Steel Corp. _v.

Commissioner of Internal Revenue [57-1° USTC

49590], 243 F.2d 125, (9th Cir.), cert. denied, 355

U.S. 906, 78 S.Ct. 333, 2, L.Ed,2d 261 _(1957).”

In this case, the hcuiser C. W. Edwards’ signally failed

- to discharge his burden of proof by not having any recard -

of such entertainment or tfavel expenses, -and I therefore

hold that he ‘has failed- reasonably to establish with suf-

ficient certainty to entitle him to make any recovery of

the amounts that he allegedly spent for such entertain-

ment or travel expenses. le

«ec

Rig Me au Je

In line with the above facts and. the applicable law, I

find that the claimed ¢ expenses of Mr. C. W. Edwards in

the amount of $22, 600. 00 are non-deductible personal ¢ ex-

penses. 3

The aici and foregoing shall constitute the Findings

of Fact and Conclusions of Law herein.

The question of court costs is adjudicated as follows:

Two-thirds shall' be paid. by the Plaintiffs and one-third . |

.. by the:Defendant. ‘

The Clerk will notify counse].

Appendix A

pena Revenue Code of 1954:

- SEC. 11. TAX IMPOSED.

(a) Corporations in General.—A tax is hereby im-

, Posed for each taxable year on the taxable i income of every

*corporation:. The tax Shall. consist of a normal tax com-

,. puted under subsection ( b) and a surtax computed under

subsection (c).

( b) Normal Tax.—

1) Taxable years beginning before July 1, 1964.—In

the case of a taxable year beginning before July 1, 1964,

the normal. tax is equal . ‘to 30 percent of the taxable in-

come. Pa eet

way Taxable years beginnirig nha June 30, 1964. —_

In the case of ‘a taxable year beginning after June 30,

1964, the normal tax’ is — to 25 percent of the taxable.

income.

SPR MN

the amount by. which the taxable income (‘computed with-

out:regard to the deduction, if any, provided in section 242

for partially tax-exempt interest) exceeds $25,000.

(26 U.S.C. 1958 ed., Sec. 11.) Si >

SEC. 61. GROSS INCOME DEFINED.

(a) General Definition. —Except as otherwise provided .

in this subtitle, gross income means all income from what-

ever source derived, adn

artic ae re

(26 USC 1958 ed., Sec. 61.)

| SEC. 162. TRADE OR BUSINESS: EXPENSES,

(a) In General.—There shall be allowed as a deduction

all the ordinary and necessary expenses paid or incurred

during the taxable year in carrying on any trade or busi- ,

ness, including— : ra

: ee

; (2) traveling expenses’ (including the entire amount

- expended for-meals and lodging) while away from home

in the pursuit of a trade or business; * * *

a ee

(26 U.S.C. 1958 ed., Sec. 61.)

SEC. 167. DEPRECIATION.

(a) General Rule—There shall be allowed as a de-

preciation deduction a reasonable allowance for the ex-

y a

¢ bed -

: aor Dx. > sa vane eR iy

haustion, wear and tear ( including a- reasonable allow-..

ance for obsolescence )—

(1) of property used in the trade or business, or

(2) of property held for the production of income.

(b) Use of Certain Methods and Rates-—For taxable .

years ending after December 31, 1953, the term “reason-

able allowance” as used’ in subsection (a) shall include

(but shall not be limited to) an allowance computed in

accordance with regulations prescribed by the Secretary

or his delegate, under any of the following methods:

(1) the straight line method,

(2) the declining balance method, using a rate not ex-

ceeding twice the rate which would have been used had

the annual allowance been computed under the method

described in paragraph (1), |

(3) the sum of the years-digit method, and

(4) any other consistent method. productive of an an- .

“nual allowance which, when added to all allowances for

the period commencing with the taxpayer’s use of the

property and including the taxable year, does not,’ during

the first two-thirds of the useful life of the property, exceed

the total of such allowances which would have been used

had such allowances been computed under eo

- described in ‘paragraph (2). ~ ence ere:

Nothing in this subsection shall be construed to limit or

&reduce an allowance otherwise allowable under subsec-

~ tion (a).

—Paragraphs (2), (3), and (4) of subsection (b) shall

a +

”

)

apply only in the case of, property (other than intangible

property): described in subsection (a) with a useful life

of 3 years or more— 7 :

(1) the construction, reconstruction, or erection of

which is completed after December 31, 1953, and then

_ only to that portion of the basis which is properly attribu-

table to such construction, reconstruction, or erection after

December 31, 1953, or

(2) acquired after December 31, 1953, if the original

_* use of such property commences with. the taxpayer and |

commences after such date.

es ¢ 2

(26 U.S.C. 1958 ed., Sec. 167.)

SEC. 248. ORGANIZATIONAL EXPENDITURES.

(a) Election to-Amortize.—The organizational expendi-

tion (made in accordance with regulations prescribed by

the Secretary or his delegate), be treated as deferred ex-

. penses. In computing. taxable income, such deferred ex-

Py penses shall be allowed as a deduction ratably over such

period of not less than 60 months as may be selected by

‘the corporation (beginning with the.month in which the

corporation begins business).

(b) Organizational Expenditures Defined.—The term

“organizational expenditures” means any expenditure

— which— | |

(1) is incident to the creation of the corporation;

(2) is chargeable to capital account; and

\§3

(3) is of a character ‘which, if expended incident to

the creation of a corporation having a limited life, would

be amortizable over such life. sige se

provided by Subsection (a) may be_made for any tax-

able year beginning after December 31, 1953, but only

if made not later. than the time prescribed by law for

filing the .return for such‘ taxable year (including ex- .

‘tensions thereof). The period so elected shall be adhered

to in computing the taxable income of the corporation

for the taxable year for which the election is made and

all subsequent taxable years. The election shall apply only

with respect to expenditures paid-or incurred on or after |

> 2

the date of enactment of this title.

(26 U.S.C. 1958 ed., Sec. 248.) &

SEC. 269. ACQUISITIONS MADE TO-EVADE OR

-AVOID INCOME TAX.

2(a) In General.—If—.. * te

(1) any person or persons’ acquire, or quired on or

after October 8, 1940, directly or indirectly, control of

a corporation, or ? \

(2) any corporation acquires, or acquired on or, after

October 8, 1940, directly or indirectly property of an-

other corporation, not controlled, directly or indirectly,

immediately before such acquisition; by such acquiring

corporation, or its stockholders, the basis -of which prop-

erty, in the hands of. the acquiring corporation, is de-

termined by reference to the basis in the hands of the

‘transferor corporation.

and the principal purpose for which such acquisition was’ °

made is evasion or avoidance of Federal income tax by

84 —

ance, which such person or corporation would not other-

wise enjoy, then the Secretary or his delegate may dis-

allow such deduction, credit,- or other allowance, For

purposes of paragraphs (1) and’ (2), control means the

ownership of stock possessing atleast 50 percent of the

total combjned voting power of all classes of stock en-

titled to vote or at least 50 percent of the total value

of shares of all classes of stock of the corporation.

(b) Power of Secretary or His Delegate to Allow De-

duction, etc., in Part—In any case to which subsection

(a) applies the Secretary or his delegate is authorized—

(1) to allow as a deduction, credit, or allowance any

part of any amount disallowed, by such subsection, if he

determines that such allowance will not result in the

evasiofi or avoidance of Federal income tax for which the

acquisition was made; or

(2) to distribute, apportion, or allocate gross income,

and distribute, apportion,. or allocate the deductions,

credits, or allowances the benefit of which was sought to

be Secured, between or among the corporations, or prop-

. , | ; | &

Securing the benefit of a déduction, credit,°or other allow-

€

erties, or parts thereof, ‘involved, and. to allow such de-..

ductions, credits, or allowances so distributed, appor-

tioned, or allocated, but to give effect.to such allowance

only to such extent as he determines will not result in the

evasion or avoidance of Federal income tax for which the

acquisition’ was made; or

(3) to exercise his powers in ‘ie undef paragraph (1)

and in hac under paragraph (2).

* *-*

(26 U.S.C. 1958 ed., Sec. 269.)

Coe,

. «85

SEC. 451.. GENERAL RULE FOR TAXABLE YEAR

OF INCLUSION. : De a:

(a) General Rule.—The amount of any item of -gross

income shall be included in the. gross income for the tax-

able year. in which received by the taxpayer, unless, unde?

the method of accounting used in computing taxable in- ~

come, such amount is to be properly accounted for as of

a.different period, |

(26 U.S.C. 1958 ed., Sec. 451.) _

“re oe

ee nes

SEC. 482. ALLOCATION OF INCOME AND DE.

DUCTIONS AMONG TAXPAYERS.

. In any case of. two or.more organizations, trades, or

businesses (whether or not incorporated, whether or not ;

organized in the United States, and whether or not affili- -

ated) owned or controlled directly, or indirectly by the”

same interests, the Secretary or his delegate may distribute,

apportion, or allocate gross income, deductions, credits, or .

allowances berwa or among such organizations, trades,

or businesses, if he determines that such distribution, ap-

portfonment, or allocation is necessary in order. to prevent

evasion of taxes or clearly to reflect the income of any of

such organizations, trades, or businesses.

(26 U.S.C. 1958 ed., Sec. 482.)

SEC. 544. RULES FOR DETERMINING STOCK

OWNERSHIP. % |

(a) Constructive Ownership.—For purposes of deter-

mining whether a corporation is a personal holding com-

pany, insofar as such determination is based on stock

ownership under section 542 ( a)(2), section 543 (a)(5),

or section 543(a)(6)— | moe

. \

a \

. . \

* SOREN EMRE NE Re ENA NBR cmp rr

' : “2 . ‘

“f ee “an |

86 -

(1) Stock not owned by individual, —Stock. owned, >

directly. or indirectly, by or for a. corporation, partnership,

estate, or trust shall be considered ‘as being owned pro-

portionately by its shareholders, partners, or beneficiaries. -

(2) F amily and partnership ownership. An individual

. shall be considered as owning the stock owned, directly

“Or indirectly, by or for his family or by or for his partner.

For purposes of this paragraph, the family of an individual

includes only his brothers and sisters (whether by the’.

whole or half blood), ‘ spouse, ancestors, and lineal ~~

oe cendants.

(3) Options. akg any person has an option to acquire

stock, such stock shall. be considered as owned ‘by such °

- person. For purposes of this paragraph, an option to —

acquire such ah option, and each one of a series. of such

options, shall: be. considered as an — to” — such

stock. ‘

(4) Application of family-partnership and option rules.

—Paragraphs (2) and (3) shall be applied — a

‘ (A) For purposes of the stock ownership requirement -

provided in section 542 (a)(2), if, but only if, the effect

is to make the corporation a personal holding * company;

(B) for purposes of section 543(a) (5) (relating to

personal service contracts), or of section 543(a)(6) (re-—

‘lating to the use of property by shareholders), if, but

only if, the effect is to make the amounts therein referred

to includible under such peregraptt as personal holding

company income.

(5) Constructive pwarahip: as” ‘actual “ownership. _

Stock constructively owned by a person by reason of the

i Ja : - at

______1951, all or part of its property (other than money) to ——

2a To

application of paragraph (1) or (3). shall, for purposes «|

ownea by such. person; but. stock constructively owned

by an individual by reason of the application of paragraph ia ,

\(2) shall not be treated as owned by him for purposes of '

_~ again applying such paragraph in order to make another :

-’ the constructive owner of such stock. | '

(6) Option rule in lieu of family and partygrship rule, |

—If ‘stock-may-be_considered as owned by an-individual * ~ |

_ under either paragraph (2) or-(3)-it-shall be considered

as owned by him under paragraph (3),

es ‘6

(26 U.S.C. 1958 ed., Sec. 544.)

SEC. 1551. DISALLOWANCE OF _SURTAX EX- |

_EMPTION. AND * ACCUMULAT&D EARNINGS ° |

CREDIT. — .

If any corporation transfers, on or after J anuary 1,

another. corporation which.was created for the purpose of

acquiring’such property or which -was not actively engaged

in business at the time of ‘such acquisition, and’ if after

such transfer the transferor corporation or its stockholders,

or both, are in control of such transferee corporation ;

- during any part of the taxable year of such transferee

corporation, then such transferee corporation shall not ;

: .-u-,,40F' such taxable year (except as may be otherwise de-

termined under section 269( b)) be-allowed either the

$25,000 exemption from surtax provided in section 11(c) ;

or the $60,000 accumulated earnings credit provided in

paragraph (2) or (3) of section. 535(c), unless: such |

transferee’ corporation shall. establish’ by the clear pre- .

- ponderance ef the evidence that the securing of such =

exemption or credit was not a major purpose of such .-

transfer. For purposes of this section, control means -the

. Ownership of stock. possessing at least 80 percent of the

total combined voting power of all classes of stock entitled

‘to vote or at least 80 percent of the-total value of shares .

of all classes of stock of the corporation. In determining

" the ownership of stock for the purpose of this section, the

ownership of stock shall be determined in accordance with

the provisions of section 544, except that constructive

ownership under section 544(a)(2) shall be determined —

‘only with respect to the individual’s spouse and minor

children. The provisions of section 269(b), and the au-

thority of the Secretary under such section, shall, to the

extent not inconsistent with the provisions of this section, ;

be applicable to this section. (26 U.S.C. 1958 ed., Sec.

1551.)

Treasury “Regulations on Income Tax saa Code):

Sec. 1.167(a)-1. Depredigiton in general. —(a) Reason-.

_ able allowance. Section 167 (a) provides that a reasonable

- allowance for the exhaustion, wear and tear, and obso-

lescence of property used in the trade or business or of

property held by the taxpayer for the production of in-—

come shall be allowed as a depreciation deduction. The

allowance is that amount which should be set aside for

the taxable year in accordance with a reasonably con-

: sistent plan (not necessarily at a uniform rate), so that

the aggregate of the amounts set aside, plus the salvage

value, will, at the end of the estimated useful life of. the

depreciable property, equal the cost or other basis of the

property as provided in section 167(g) and § 1. 167(g)-1.

An asset shall not be depreciated below a reasonable

"89

salvage value under any method “Of computirig deprecia- .

tion. However, see Section 167(f). and § 1.167(f)-1 for

value to be taken into account for certain personal prop-

erty acquired after October 16, 1962. See also paragraph

shall not. reflect amoynts representing a mere reduction—

in market, value. See section’ 179 and § 1.179-1 for a

further description of the term “reasonable allowance.”

(b) Useful life... For the purpose of section 167 the

estimated. useful life of 4n asset is not necessarily the

useful life inherent in the but is the period over

which the asset may reasonably be expected to be useful

to the taxpayer in his trade or business or in the produc-

tion. of his income. -This period shall be determined by

reference to his experience with similar property taking

‘into account present conditions and. probably future de-

velopments. Some of the factors to be considered in de- .

termining this period are (1) wear and tear and decay or

decline from natural Causes, (2) the normal progress of

the art, economic changes, inventions, and currentt@e-

velopments within the industry and the taxpayer’s trade or

business, (3) the climatic and other local conditions pe-

. Culiar to ‘the taxpayer’s trade or business, and (4): the

taxpayer's policy as to repairs, renewals, and replacements.

Salvage value is not-a factor for the purpose of determin-

ing useful life. If the taxpayer’s experience is inadequate,

the general experience in the industry may be used until

such time as the taxpayer’s own experience forms an ade-

quate basis for making the determination. The estimated

remaining useful life may be subject to. modification by

reason of conditions known to exist at the end of the

taxable year and shall be redetermined ‘when necessary

ad “

ORRIN MTT v

hinted in ode

eo EL TERETE LYE MEO EAS HEN

Cee Reha a

regardless of the method of computing depreciation. How-

- ever, estimated remaining useful life shall be redetermined

only when the change\in the useful life is significant and

there is ‘a clear and convincing basis for thé redetermina-

tion. For rules covering\agreements with respect to use-

ful life, see section 167(d) and § 1.167(d)-1.

termined at the time of acquisition) which is estimated

-will bé realizable upon .or other disposition of an asset

; when it is no longer useful in the\taxpayer’s trade or busi-

-’ ness or in the production of his spi and is to be re-

- tired from service by the taxpayer lvage value shall not —

be changed at any time after the determination made at .

the time of acquisition merely because of changes in

price levels. However, if thére is a redetermination of

useful life under the rules of paragraph (B) of this sec-

ined based upon facts

; — of useful life.

Salvage, when ‘reduced by the cost of removal, is referred

| to. as net salvage. The time at which an asset is retired

\ from service may vary according to the policy of the tax-

payer. If the taxpayer’s policy-is to dispose of assets -

which are still in good operating condition, the salvage

value may represent a relatively large proportion of the

original basis of the asset. However, if the taxpayer cus-

tomarily uses an asset until its inherent useful life has

been substantially exhausted, salvage value may represent _

no more than junk value.’ Salvage value must be taken

jnto account in, determining the depreciation deduction

either by a reduction of the amount subject to depreciation |

or by a reduction in the rate of depreciation, but in no

event shall an asset’(or' an account) be depreciated be-

low a reasonable salvage value. See, however, paragraph

(a) of §.1.167(b)-2 for the treatment of salvage under

the declining balance method, and § 1.179-1 for the treat-

ment of - salvage in computing the additional first-year °

* depreciation allowance. The taxpayer may.use either sal-

vage or net salvage in determining depreciation allowances

_ but such practice must. be consistently followed and the

treatment of the costs of removal must be consistent with

: the practice’ adopted. For specific treatment of salvage

value, see §§ 1.167(b)-1, 1.167(b)-2, and 1.167(b)-3.

When an asset is retired or disposed of, appropriate ad-

justments shall be made in the asset and depreciation re-

Serve accounts.,-~For example, the amount of the salvage”

adjusted for the.costs of removal may be credited to the

depreciation reserve. :

* *# *

(26 GFR, Sec. 1.167(a)-1.) |

Sec. 1.248-1. Election to amortize. organizational ex-

penditures.—(a) In general. (1) Section 248( a) provides

that a corporation may elect for any taxable year begin-

ning after December 31, 1953, to -treat its organizational _

expenditures, as defined in subsection ( b)<of section 248 ~

and in paragraph (b) of this section,’ as deferred expenses. -

A corporation which exercises such election must, at the

time it makes the election, select a period of not less than

60 months, beginning with the month in which it began

business, over which it will arhortize its: organizational —

expenditures. The period. selected by the corporation may

be equal to or greater, but not less, than 60 months, but

- in any event it must begin with the month in which the

- corporation began business. The organizational expendi-

_tures of the corporation: which Are treated as deferred ex-

r .

io RINE BREN ak a

a PRLS RET EI ANT, WEEE USES ALON

‘ .

. 92

”~@ ¢

penses under the provisions of section 248 and this section _

~ shall then be allowed as a deductiom in computing taxable

income ratably over the period selected by the taxpayer:

The period selected by the taxpayer in making its election.

may not be subsequently changed but shall ‘be adhered

to in computing taxable income for the taxable. year for

which the election is made and all subsequent taxable

years. y : °

(2) If a corporation exercises the election provided in

section 248(a), such election shall apply to all of its ex-

penditures which are: organizational expenditures. within °

the meaning of subsettion (b) of section 248 and para-

_ graph (b) of this section. The election shall apply, how-’ |

ever, only with respect to ‘expenditures incurred before

- the end of the taxable year in which the corporation be- :

gins business (without regard to whether the corporation

files its returns on the accrual or cash method of account-

ing or whether the expenditures are paid in the taxable

year in which they are incurred), if such expenditures

are paid or incurred~on or after August 16, 1954 (the

date of enactment of the Internal Revenue Code of 1954).

(3) The deduction’ allowed under ‘section 248 must be’

| $pread over a period beginning with the ‘month in which

the date the corporation begins business présents a ques-

tion of fact which must be determined in each case in

light of all the circumstances of the particular case. The

words “begins business,” however, do not have the same .

meaning as “in existence.” Ordinarily, a- corporation be-

gins business when it starts the business operations ‘for -

which it was organized; a corporation comes into existence

on the date of its incorporation. Mere organizational

radi

her

v; ’ ‘ ‘ ee ae ea ce SP ae Cee Wi Reeeire ve

“€4 P

activities, such as the obtaining of the corporate charter, —

..are.not alone sufficient to show the beginning of. business. :

If the activities. of the corporation have advanced to the -

extent necessary to establish the nature of its business 4

Operations, however, it will’ hé& deemed to shave begun’ .

business. For example; the’ (quisition of operating assets

x which. are necessary to: the Aype of business, contemplated

_ May constitute the beginnifg of business. Pade

e . . x * of ‘ .

(c). Time dnd.manner of making election.. The elec-

tion provided by. section 248 (a) and paragraph (a) of '

this section shall be made in a Statement attached to the

taxpayer's return for: the taxable year in which it begins°

business. Such taxable year must be one which begins -

after December 31, 1953. The’return and statement must ~

be filed not. later than the date prescribéd by law-for filing

the return (including any extensions. of time) for tlie tax-

able year in which the taxpayer begins business: The’ state-

ment shall set forth the description and amount of tlie ex-

penditures involved, the date such expenditures were in-'

curred, the month in which the corporation .began ‘busi-

hess, and the number of months. (not. less than 60 and be-

ginning with the month in which’ the taxpayer began busi- *

ness) over which such expenditures are to be deducted’ .

ratably. : : : _

(26, C.F.R., Sec. 1.248:1.)

“~

_ ; ‘

Sec. 1.451-2.° Constructive receipt of income. — (1)

General rule. « Income although not actually teduced to

‘a taxpayer’s: possession is constructively received by him = -

in the taxable year during which it is credited~to his ac-

count, set apart for him, or otherwise made: available_so

oO an

eats 8 ia cone hs

that he may draw upon it at any time, or so that he could

have drawn upon it during the taxable year if notice of

intention to withdraw had been given» “However, income

is not constructively received if the taxpayet’s-cot ontrol of

its receipt is subject to substantial bee acl or Testric-

tions. Thus, if a corporation credits its employee =

bonus stgck,’ but the stock is not available to such em-

Ployees until some future date, the mere crediting on the

books of: the corporation. does not constitute receipt. In

the case of-interest, dividends, or other earnings (whether

or not credited) payable in respect of any deposit or ac-

count in a bank, building and loan association, savings .

and loan association, or similar institution, the following

‘are not substantial limitations or restrictions on the tax-

- payer’s control over the receipt of such earnings:

-(1) A requirement that the deposit or account, and the

earnings thereon, must be withdrawn in multiples of even

amounts;

(2) The fact that the taxpayer would, by not: with-

drawing’ the earnings until’ a iater date, receive a-higher

rate of earnitigs than would be payable if the corning dre

withdrawn during the taxable year;

(3) A ‘requirement that the earnings may be with-

drawn only upon a Withdrawal of all or part of the de-

posit or account. However, the mere fact ‘that such in-

stitutions may pay earnings on withdrawals, total or par-

tial, made during the last three business days of any

calendar month ending a regular quarterly or semiannual

- earnings period at the applicable rate calculated to the

end of such calendar month shall not constitute construc-

tive receipt of income ‘by any depositor or account holder

™,

~~,

“

in any such institution who has not made a withdrawal

during such period; — ;

(4) A requirement that a notice of intention to with-

draw must be given in advance of the withdrawal. In any

case when the rate of earnings payable in respect of such

a deposit or account depends on the amount of notice of

intention to withdraw that is given, earnings at the maxi-

mum rate are constructively received during the taxable

year regardless of how long the deposit or account, was

held during the year or whether, in fact, any notice of

intention to withdraw is given during the year. How-

ever, if in the taxable year of withdrawal the depositor

or account holder receives a lower rate,of earnings because

he failed to give the required notice of intention to with-

draw, he shall be allowed an ordinary loss in such taxable

year in an amount equal to the difference between ‘the -

amount of earnings previously included in gross income

and the amount of earnings actually received. See sec-

tion 165 and the regulations thereunder.

+ * *

(26 C.F.R., Sec. 1.1451-2.)

Sec. 1.1551-1. Disallowance of surtax exemption and .

accumulated earnings credit.—

*- * * 9

(d) Nature of transfer. A transfer made by any cor-

poration of all or part of its assets, whether or not such

transfer qualifies as a reorganization under section 368

is within ‘the scope of section 1551 except that section

1551 does not apply to a transfer of money only. For

example, the transfer of cash for the purpose of expanding

meee aaa’

the business of the transferor corporation through the

formation of a new corporation is not a transfer within

the scope of Section 1551 irrespective of whether the new

corporation uses the cash to purchase from’ the transferor

corporation stock in trade or similar property.

(e) Purpose of transfer. In determining, for the pug-

pose of section 1551, whetlier the securing -of the exemp-

tion from surtax or the accumulated earnings credit con-

stituted “a major purpose” of the transfer, all circum-

stances relevant to the transfer shall be considered. For

disallowance of the surtax exemption and accumulated

earnings credit under section 1551, it is not necessary that

the obtaining of either such credit or exemption or both

have been the sole or principle purpose of the transfer of

the property. It is sufficient if it appears, in the light of

all the facts and circumstances, that the obtaining of such

exemption or credit, or both, was one of the major con-

siderations that prompted the transfer. Thus, the securing

of the surtax exemption or the accumulated earnings

credit may constitute “a major purpose” of the transfer,

notwithstanding that such transfer was effected for a valid

business purpose and qualified as a reorganization Within |

the meaning of section 368. The taxpayer’s burden of

establishing by the clear preponderance of the evidence

that the securing of either such exemption or credit or

both was not “a major purpose” of the transfer may be

met or example, by a showing that the-gbtaining of such |

exemption, or credit, or both, was not a major factor in

relationship to the other consideration or considerations

which prompted the transfer.

(26 C.F.R., Sec. 1.1551-1.)

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.