# Appendix — Bay Sound Transportation Co. v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385604_1061%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1969 - **Citation:** 396 U.S. 928 ## Text , LIBRARY ae co 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 a ‘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 C Oe 4 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 .. Se ee eel EG GO a Dh Page | 18 FIER ONL RS 9or Sept * “REE Re he ECT OLOLNL OLE ° i! ae wey - »” . : be g . | . » ° : | | > | =, ; * Rae | A a ‘ : ® x : ; . ° ° 6 | | . . . Ye 7 . ry? . - | @ : . | - 4 | * ae | - | . | | 7 AE = , h x ? : . | 7 . 5 _- a ’ = 2 ‘ : : - Ed | * | ae ; ~\ ; | ; | ? . = +. © 7 | , uy sf . ais on * 3 2 , as ‘ ; . ¥ ‘. | | : 5 “i+. “g ie 3 eo — ; | ae | . . , s ; | | > | % e 4 . . ¥ | Aaa : | ; / | . rN o “is ~ 7 ; - é | | e “ , ‘ ; ; / : . | ‘ ° Ie tf ; ne | 7 - | | “«. oe | . . ¢ e ‘ e ete SS eral “tt ’ | 2 er | + * ; | : . s . ‘ | . ° r, ’ ~ - : | : we . ’ 5; : “sy | 2 ‘ : | off. . & | ’ - | es ~ | | 9 J ‘ tone . ae | 3 * | a >» ‘ : | 4 Be ine I ‘ , ae ta r ¥ | 4 ‘ * 2 ‘ ee, | . , . : ’ ~” . re gs | : . . | oe - i 4 ‘ - . « Seay ” al : | e : e ; > . . Me i j iy . * ; ‘S & te NO. / IN THR pane Court of ra United States October Térm, 1969 BAY SOUND TRANSPORTATION CO. et al., Petitioners V. ds 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.) oy 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- Pd UNITED: STATES OF AMERICA, Respondent § 2 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 / \ % \ 5 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), ; \ . =: 4 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. * * * : a f / 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 0 geo ose eh rem, be f . = Pan et 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. : . o : a ‘ ra ‘ ‘ ” - ‘ . : 4 ’ . o jae Li . lo sons - ‘ ~~! ’ 4 . , ce? Bs ) - 12 4 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 14 d - 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. t a!) } 15 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. 16 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. 18 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. J 19 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. 2 -4 o WEBS O Seat ae 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 - © 2-28-59/60 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 -2-28-59/60 8-31-59/60° 8-31-59/60 4-30-59/60 12-31458/59 12-31-58/59 12-31-58/59 12-31-58/59 12-31-58/59 “¥, ° 7 -1231-58/59 oa J 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 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 ad 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 GSdvesie 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. ag . 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 * \ 4 son “aay us : ‘ Z om 30 7 t 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 3 i Wilkins Barge Line, Ltd: Barge Deita Joint Venture . 1967 andar Federal Tax Reports ro ag PNET EN, ERIN ROIS II TON OTT A RTD ~ 95/2 /P asivg TeSIWIN G/st/9E 0D a8ieg ues WIN ‘ s s (dyyssauzsed &) a OVE Ws 8 makes +e” geenend 9S 'ZPI'Sze 9s/s /t yeoqueng 9 rte | 1S /61/2t eeceee eae ‘0D e3.10g Bujj1971S ———— ‘ ; is ' “ § + © % 480 pazinboy-. 128834 128S9A JO aeN pezjuesiQ. JQUMO Jo aweN” r aamnog 0} sv pro 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). . SORA AMOR IAS OE PE GEO + . ‘2. ’ “ eee ° | ROIs NBR tina FLOAT Bde colbert rel Ao * a esse Ste cates! AP Mai Re bbe ae 8 sine , ¥ ° x 34 » 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 : ad : 85,138 U. 8. Tax Cases Mamber 47—142 Bay Sound Transportation Co. et al.v. U.S. ; 9-00-67 om iii edaceeesceaass Stsecccsseooeeee i dddddidddddddda Gdddddddddidddad g | [Maaaeaa a eee ee: Bre he he he sa a Be Ba Be ss Bs K (gSebeneseanea . —— a ilguunsenzzrnene ‘iN | | fliasseesaeas Tug Hazel W.** Taxable Income a >. >. . >. 7 >. >. > . >. >. 7 >. ie ate : ilgyauseusarasye | lll HAT | [ivauaageayaasy | | f HRB | qe + ft RBS DA eee Utemseenentersn|] |) | UE i eavennoneesnent | » a 37 io Court Decisions —Cited 67.2 USTC 85,138 Bay Sound Transportation Co. et al.v. U.S. : a Pitiiti: Behe | : sigs SE se ; Ta : i fiitiiiiiedlé [§ ¢ aad | Piti:ii: eqs. : Hae aa PB ceeeaee| | HA HM ERR | i eae anes tgle..... \, cael PEiiii! SmmOeg Sere: 8 ut See no | RA fe BEEBE EEE EERE! ceeectactaze euateneter| : faadaaacaicdaaeals| sa hs Bs Bs a ss Ba Z | B vsesigpesve aa 4 SAS SSOERERE.. : iit sgssezsaana... pn || Fem | bitin 1967 Standard Federal Tax Reports 7 q 9641 | U.S. Tax Cases Bay Sound Transportation Co. et al.v. U.S. & ; ; . “OQ woNw20d SONS, OH ENTE A) CaN OH 50 COUTIER OH SED HED WS EEN, CHNETNTE AS CUENED, GS 5) GAINS SORES SAE) OUP SUUD-CEED ane “OD uo]}B}400 “iuesL punog Avg 4q aus) ay 30 souTTEq ay) SULMP pue “OD Uo; eWOdsUELL wUEIs;NOT ‘es eceseccerdes 61 LI-OI id ‘> “xa ‘d saheuse” € Be F* « See TT €6T'9 1 Tey Pere eet NS el ei 0be's £09'69 tw's iheeeaeee c96I LT-Ot “dd ‘> “xq ‘a aes TS et 76's m9 Shel aaa T96T Sg RR a 2 tac 6LS'Z L6'L6 me's wero O96T LY-OT “dd *p “xa ‘ad 600'9 808 ‘PLT sev's £62 ‘SOT ° 9rs'9 Balers 656 LY-Ot “dd ‘> "xa ‘d so'rs SSI'tL o10'y 086 ‘TS vel’ eee 47° °° 44: S561 LT-OI “dd ‘> "xa ‘a eT sj eee 9906 Tve'sL 908'6 Eada LS6T . LI-OI ‘dd ‘b "xa ‘da gine ek rte: ere’6 Ts'99 ezs'6 owe ;;’"** 996T we LU-Or “Gd ‘b “xa ee pe 6909 Tsz 68 vel'9 .. epee S961 8 LI-OL “dd ‘p> “xa ebony MES deta Ose'L Last. Li6'¥ —. =Eaurreees WEI band xo PAA NL eee eee wet aL0'Sse cee 1166'S? eee Pee ee S6T ° © evV—t-y ‘dd ‘§ ‘xa ‘da teh is us‘zs 606s) casts Ch aa east ' soussajay preoey: uuy JUL yoQYs BAL Bn soyys0g BNL y sT9's a ee ee ° ws'e ow'ss ose's mm oo S961 b 6'L SS ais soko te ecient e s0L'8 9LL'OOT Ts8'8 omm °*°Cr**ess y6T szs's ets. fee 2 hee ° 9995'S 885801 1238's ae. £961 Ls0'> Se ere hte. tree ° 809'L Sa. ‘88 wos en ceeeneeees z96T weL'6 ozs net a mete ° 908'9 ore ter 608'6 60.06 | T86T 6Is'9 a Ol OU ° gis's Ur'vr 02'S ows O96T 1st'6 181'69 ° 8zP'6 SeT'L9 ° 6ez'OI VAL ‘LT 16's E cheseeenes @S6T z368't ys0'66 e eres $96 ‘08 e 19'S 66L'WOT oes'9 fe. renesenes 861 60e'IT STL 6S ‘98 ocssors * QL0'L eTe'60t —o oow uC LS6T 680'6 pre’orr ee eee e crs’s U6 OI we es 1 eater cae 9ST S19'S TOL EL seta Vai} ° as Ser 96 -—e — aabaaeetepe: So6T . L169 68T'LS +n arp ale istets ° goc's Lg0'TOT 16 goe'ct = ST OLS‘ aE TE cach, SR sercoriemin. Uhsip’ ax i ° wos’ 80°86 Oe owt S96T Tes‘ss wee ¢ A NR tach ce! S, iaiyt J . ists ook ¢ wes iia TS6T @uioouyl +sujedey enueasy euoour =sijedey 0 8060enueAsy O(euOOUT suredey enuesey 46 @urooUT suledey enusasy Suing ’ —_ uvuseyV.d 3nL oof PL DO INL souty 3nL syuresy 31 (OQ woe wodsrsL | S21 110 Fe Umouy Je") “OD VO!eOdsuBAyL BUEISINE] _ s _- S . - " . ne tee ER | ‘ nN ‘ 85,143 67-2 USTC 39 Court Bay Sound Transportation Co. et al.v. U.S. mad J ioe cr Coa ’ Taek eee RL Che Sar'Lz S19‘. —0o- ooo et 919'0r 96L'S 196 '6L S08‘T? TELL ) .) aa weet cor'zz 900’ 00°08 os0'D 7 966 “KIS veo've8 Lev’ oeL's worms eet cst as 00008 oe —O~ 000'eT ease ' go's 0906 cL 9905'S tw Oor wR6T @5t'ST vLe's @0L ‘Sz —o— —O— oz yer ‘oP C20'L ZI6‘LOT 198'6p ss'6 4.4 T96T Sor'ez bs 4 00008 asst) —O— © oz gen ‘Sze 10'S 6te's9 & = OST SS 90'S es0w%st ooet' ToL ‘oe -—e o00‘'0e asm -@ awe °° "= "ps of “of 0s a os ent G6 gitz‘er i 0000S os S-l—lC( cekae kite im in acs ee peed SLATE ae OA Eee ees See’ ae re a ihe eee sees orereereeeee — @woouy sijedey enueasy 4 «6suNmOUrl) «(siyeday enueAsy = 6aucOUT sujedey enuessy = Guo «= SIyedey OO enUaAaY Sujing a1qexeL ¢ a1QUxay a1qexey . 1QUxaL Suiped ag e3ieg ang s3eg | £eg woxid yoqysng aupsED ywoqueng ecee OD O21¥g AT eco OE O31¥g AC _ 0 0D WonvpodsueLL Avg UoxXIg L 2 OD Bujmol euysyD a * ec > 9 1967 Standard Federal Tax Reports Number 47—146 ° | U. 8. Tax Cases Bay Sound Transportation Co. et ol.v. U.S. 2 ; ‘xa ‘a: ; ‘9° ‘S “XH “a :ss0uageyas paccer ‘Sujsomos ayy uy peayeyu0o CAPE Sa CREED om tee eS eet eecee ; way {St “XH\"C 03 FO “Xa ‘f : sa d 1S90UAESFAE PICA SUpMOTOy 2x} UW] pouywyWOS woPwULIC;U WOlZ P2eApiep av AUBdWIOS SI) OF SujusypJed sSINZy PIVMNQu, SUL seve ; ; "OC a ‘b 'XE “dl SST “XE "1 9-0 “XG ‘ed ‘9 “xa ‘A ‘OT-V ‘S ‘XH ‘d :Seowaseyal Pr0cel Zujmojqos ey) Ul PeuTeUCO Ud) WOIy PaAjlep ary AuBduIOo sjyy 02 Sujufezsed sain3y PIIV[NGe) SUL ove ; “oe ‘St “db XE [CT “XE “CO S-O “Xa ‘I'd ‘9 Xa ‘d ‘ET-V ‘S ‘XG ‘d :se0uasayar prcoas Sujmoyjoy 2y3 Ul peuTe}u0D WO _peAjiep are AuBdusoo Siu O32 Sujuywpied sammy paeViNgu) SUL oe ff _ BUAUHLIAAOD ay} Aq $3]1078B01I9,U} JO sojAJes |yIdsep PoysUINS WOU Wid » Sel se / (00 oe. St 0086 eeee a eee eee 996T a g % 3 6 q & q i é « o tod 2s etc 9961 one‘eT es 60ST o'Tr Lee’Tl ‘O6T «°° “9R6T 6z0'sT -——- 006‘Lt ——_ 19 ‘et — 00006 008% == 000‘ZT wie. 989°6T west S96T sst‘9 19> SLE €80°St “= ooowe 2 -——- 000‘ZT 9Lz‘v9 00S‘se oeL‘eot T96T 1z8'6 -— 000‘ST tweet 9 dooce tC ——- 000‘ZT ezL‘va Co ged wezor T96T 066'z eo 000'ST 4 oe 000‘0e (aLz‘e) te. $ 000°TT Ter'ss 98e‘ST wo'err = O96T (ag6't)s as crlsts TL ‘L —o—* 000‘0e (oss) =" 00s ‘OTs sez'ez ¢ Lo west @6T -s POP ge os yezZI 5 000'0E ayer iter ete «yh ryt soos gar eee teos ¢ . zre‘sts eeeee eee eee eee eeeee eee. inher: (iit bane caida ae |. we o- roe phone twee Spans sinae BPR aas vee gear jcche | dweea 2 teammate emkee. | s“Rigghae) fo mene Ue) pment ce Qo6T Ses wean" bakes |e wneeeo = Jeee.” oak Re 0) een) or ceeded RNa 0) Oe ein 18T pale ike or aeiate dian eae LAEM cane ‘alka cane ataue pet ae: sSét ‘aren gctt dna akan apahe eésst alana cakes eg & ecaah vote pgeT @woouy sijedey onueasy 8 auOUl -SIyedsy enueasy . eumoouy sujedey. enueAsy @uzoouy sijeday anusaay _ Sune 1qUxeL MA{UXBL PIQUXBL O1QUxBL =— WRAY] 310g yer e8reg wom esieg 40g user) Bn eecee OD eBreq Weary] eoce OD 2810g FIVE eee OD O310g UOINH "OD uonwodsuviy Avg UseID s © 1967, Commerce Clearing House, Inc. s " ?. oe e Court Decisions—Cited 67-2 USTC Bay Sound Transportation Co. et al.v. U.S.’ . - / r - ’ . —— ite PO Aas sath i a A 0Aveis PERRRT ehiy GER TY LOS MANE tai ES tal i SOONG: hit Phil LSE ERENCE LGM BE Teg SAL She oa. Saami beni KMS Arctic 2 ua e ae ae ] a, e 3 : 06 4 "b'Xa “ed {ST “XE GO “MG ‘ed ‘9 xa ‘a iI-v “4 ‘S “XH ‘d ‘svowaseyar pcdes Sujmosjo; oy} ul PeureuCO woeULIOFUT WOIJ PEALIEP ase AuBduI0D s1y) 0} Fujujwped sasnBy Payeinqui dul ecece BI “bXE ‘d “ST "XE SO “XE 1d ‘9 xa a ‘PTV “d ‘9 “XH ‘d ‘esowassjai pu0ces Suymosjos Ot) Uy peusT}UCD UO}eUIO;U; WOI PeAjep are AUBdUICD Siw OY Suyurwried sammy pereindes PL seve ; ‘gtd ¥ XE d ST XE CO LO “xa 8 9 Gd ‘LTV “d ‘GS "XA “dq :eeuasezer pucces Sujmojjos ay) Ul pouTeUCD uO;ZeULIOZU; WOU; PaAjlep ase AuedWIOD s]y) 0} BujujeZad SaINSy P2eINQU) OWL eee ‘Std ‘bx ‘d ‘ST “XE BO “XE ‘EV ‘S "XE ‘d_ :ss0usseja2 pucoas Sujmojjos ey; ul peuTe}U0D uoRwULIO;U; Woy Padjep are AuBduI0D s]y) 0} SujulwiJed saIN3y paeinqei aL o “WUIUIUIOACD OY AQ 89110;8F01I9;UT JO sOjAses aydsap paysjuINy you Wied . ° e = wis’? 980°TT 118'6L 26L'9 ose 0086 ° e er a 996T aan To'sr 990'9T yae'Tl £e9'%s SL0'9 sz 000'Z1 SeS'66 896 BZ ae $961 (for'L) = Lost are Le e's L908 «= s«(G8'9) O0S'Tt «=O 6958S S9r'St sew 961 e00'0e sé WIL'T 00's = TOE OBL TT 0668 8B 900'F 8 $$ woz 0g 69 66L'9 wom oo" e961 sos 382-0 Owe BZ e139 16'S —o- —o— zt 90168 100'2t Ty eh oe cost. est 9S wae we CBs e'tor —o— —o— - zt SL9'SL ZOL ‘Oe geo T96T SI9'tZ 886 SST. Onss 480s «sees LTS 0 er'eot ors‘). 3-—0— = 002. VEP'LE . vib TZ ws'eez O96T crest 40 — oe le. oe (ys) —O— cOO'TIs sio'R 16b'Lz asses °° S6I wee 0 ee Gn I ne a oe 10g Mel ae SD eA ON, ne fe amt: ihn Aine te aE eons” a Fete ee cere) Pet be ee 6 on: uals see ae ele ka poshg > Avie ce Rt RR 5 te ey pO FA RST ele Ms be ae cece ine ak eon ise. oeen | asus’ p weonne, wanes gens,” ucenmdl, o5 2) Sahinags 0 Dooce eee cost Searle aeaie..° woken’) Gao d'St XS ‘ANH6-O xa ‘zd ‘9x ‘a: Or ‘4 ‘§ “KH ‘a :seouasajar proces Supmoqos ayy Uy peuTezU0O uO;eULIOZU; WIOIJ PeAlseP are AuEduIOD s]y) 0} BujusezIed samBy paieinqy) 2UL ... ‘GS RE dl ‘eeouasayas pucoes Suymonioy’ ow wy peurwuCD woRMMIONN WOK pexLap axe Aueduico stu oF Bujsiecied Gaede bse icon 3 DUAUTLIAAOD 943 4q $9)10j880139;Uy Jo aojala8 211dsap paystusNy you a ° a os'9 98e _ 0086 ° a ee ee 2) 9961 ~ 6r¥'s at» e90'st @cP'L azt' * “o00'2t 8y'TT £z9'z TSE co S96T Ss 989'TT TST 009'ST (Set) To9‘L 95 01 aa 1S ieee tak 961 S ore'6 956 009'St 95's tt 00021 966°TT ut ¢ OSM £961 1Ly'9 —o- 008‘St —c- gor ¢ 000'zT z1L'6 —o- > See Z96T F 00'S 61s 008 'St —o- —o 000'zT wzB —o- >) T96T z33'T viz 000'st (ezs't) oO 000'ZT osz o> 7 0961 (ve3't) 90ST 9999" (osy'st) on O00'TIS — (zez'et) aaa TL 6s6T a 990°) ww oss‘se ee) See eee | eee O° dF legac) 5 7 pe * PP Pe etcons SSé6T 3 (st0's8) war's $ W918 =: ee eoce eh! Sabaas sR I & a tts - netntie Or tealietinr | peianal, ayes ty ate ln nen enna ood > ~ swoouy aipedagy onuassy aweouy siyeday anusaay awoouy sipeday anuessy Sujing ra a1QUxeL, a1qexey a1QUxe suipieg aupeajom ease dJojsedng a3seq * ss ATBIO “38 80g pe es0e'OD 2310 BUlJ2AIOM e000) a8seg Jojsadng . 90°09 aBieg ae “15 ° “g 2 . , :. - % ~ ; 1967 Standard Federal Tax Reports _ 44 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). : 4 ’” (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 br ° 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 - $1,150.00 - Bay Sound Tratisportation Co. ‘and C. W. Edwards bis options to acquire the stock owned by the employees . (and Mr. Redding). (G. Exs. 7 & 8, Pars. Tr. 643-645, 844, 975, said P. Ex. 8L). 25. Riverside Transportation .Co., the ‘corporation or- ganized August 1,- 1959, at “ times here pertinent, was owned as follows: np) ar Rivicide: “Transport and C. W. Edwards had options to _ acquire the stock owned by the employees and Mr. Red- ding. (G. Exs. 7 and 8, Pars. 9; Tr. 643-45, 844, 975, 1294-95; P- Ex. 8Q). . Ag 26. Christine Towing, ‘Co., the corporation eaiaee ee July 9, 1957, at all times here pertinent, was owned as follows: ne Ss Name of ; of Stock | _ Shareholder . Owned . Investment . Keith Edwards ...:).... 98 - -$ 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). ty 31. Naptha Barge Co., the corporation organized De- cember 31, 1958, at all times here pertinent was owned . as follows: | ‘ $9 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 $1,000.00° (G. Exs. 7 and 8, Pars. 19, 22; Tr. 1294-95; P. Exs. 8V, 8CC, 811 8SS). 5 As is indicated in paragraph 7, supra, the partners in Siatitees Transportation Co., Ltd., are C. Ww. Edwards, 69.131%; Jack Red- ding, 5.217%; employees of Edwards Transportation Co. and/or Barge Transport Co., 27.652%. Louisiana Transportation Co. had options to acquire from Messrs. Gough, Huckaby Bryant the interests they owned in Michigan Barge Co., Erie Barge Co., Huron Barge Co. and Superior Barge Co. (Tr. 844, 943-45, 975). o te = 35. Michigan Barge Co., Erie Barge Co., Huron Barge Co., and Superior Barge Co., respectively, had options to. acquire the stock owned in each corporation by Messrs. Gough, Huckaby, and Bryant; C. W. Edwards also had ; option to acquire the stock-in the foregoing four” cor- ' porations owned by Messrs. Gough, Huckaby and Bryant. (Tr. 643-45, 844, 975). E 36. Ontario Barge Co., the corporation organized Sep- tember 15, 1958, at all times hére pertinent, was owned _as follows: aie oe Percentage | of Stock Owned Investment 90 -$-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: ¥ 53 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 é . ‘$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). c) _ 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 w Te ee ee eee 54 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). 35 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). cy 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) 56 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). (c) When Edwards Transportation. Co. or Barge Trans- ~ 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- ,2 ~ ’ } | 37 . | } . patched, and an intercompany billing process followed. & Those corporations and partnerships which owned barges f ie - 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). 59 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 ‘ ie a - — 60 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). | \ , Py ~~ . 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 | 62 / .. . . * / 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). oe 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 64 ? 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 $2,500 Buffalo Bayou partnership (2 barges) ...__.. 2,500 Barge Transport Co. (5 barges) .......... 2,500* Barge Delta Joint Venture. ................. None Ci ee None Coastal Transportation Co. ........... None IS oY ' None WE ES ec a esas) tea oan . eis. None Naptha Barge Co. ....... FP FEN er el ee None , .Navidad Barge Co.: ............. ate . None Wolverine Barge Co. ...-........... Ae ~ None- Michigan BargeCo........................ ~ None’, Ne 6h i iis os oe ,., Ome dF & i ae ...- None I I ore a eS ss None St. Clair BargeCo. ...... peal ich ya 5 None © navets BergeCo. |. eee s Aten at None * 1950 to date of trial in 1966. As to the organization expense issue: 57. Incident to the formation of 14 of the 20 new cor- porations ( between 1955 and 1960), fees were paid to Edwards Transportation Co.’s attorneys covering fees and costs incident to preparing and filing the various corpora- Oe Eee RET See tions’ articles of incorporation and holding the: first meet- + ‘ing of shareholders. These organizational costs were all | paid to the same’ law firm in amounts as follows: 66 ON WY Ig Lv Cp ‘sued ‘g FL ‘SXZ ‘D> “ce ec be 6e: 6 be ee ee ae “ec “ce e oe ee te “ . 6 “ce ee “ce eh “ec ae “ec 6 ae oe ee “ce ae “ec 6 we “c “ec ii “ “ be “ te Ae o “ te oe iT [PUL Jo ploy OY} Ul BOUdIOJOY —~—., LL'997 L9°99Z 6L°S97 vS°997 vS'99 6L°S97Z LS'997 TS'SIE LS'997 87 CLT. 18°997 T8°997¢ €6'C9T 76'79T$ “preg junowry acne she weee ee 6 Lieder ate crete os ‘0D osieg meyD "4S 2.5 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 ). 60. During 1959, plaintiff Charles Edwards ‘(at the © 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 9 as ot wl pm ay 69 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 -. 70 ’ 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 71 ge ~ 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 ‘ 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 = : ee 74 / 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. © 75 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). } 76 \2 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 ¢ t 77 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 78 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 ee «ec oe 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 80 (c) Surtax.—The surtax is equal to 22 percent of 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.) Pa SEC. 167. DEPRECIATION. (a) General Rule—There shall be allowed as a de- preciation deduction a reasonable allowance for the ex- a y a ¢ bed - : aor Dx. > sa vane eR iy 81 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). (c) Limitations on Use of Certain Methods and Rates. —Paragraphs (2), (3), and (4) of subsection (b) shall a + ” ) 82 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- tures of a corporation may, at the election of the corpora- © 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 (c) Time for and Scope of Election—The election 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 \ . . \ of ~ § * 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 oe 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 «| of applying paragraph (1) or (2), be treated as actually © 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- . . » 88 . - 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 rules which permit a reduction in the-amount of salvage © value to be taken into account for certain personal prop- erty acquired after October 16, 1962. See also paragraph (c) of this section for definition of Salvage. The allowance 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 o hinted in ode eo EL TERETE LYE MEO EAS HEN Cee Reha a 90 i 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. (c) Salvage. (1) Salvage. value is the amount (de-° 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 ~ 91 (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)