Petitioners Brief — Moline Properties, Inc. v. Commissioner

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SUPREME COURT OF THE

UNITED STATES

OCTOBER TERM, 1942

No. 660

MOLINE PROPERTIES, INC.,

Petitioner.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

On Writ of Ceritorari to the United States Circuit

Court of Appeals for the Fifth Circuit.

PETITIONER’S BRIEF

\ BART A. RILEY,

Seybold Building, :

Miami, Florida

~ THOMAS H. ANDERSON,

First National Bank Buiiding,

Miami, Florida

H. H. EYLES,

Seybold Building,

Miami, Florida.

Attorneys for Petitioner.

TABLE OF CONTENTS

Page

I ae lang chm ig esate ules ae

iene cearsiuleliciciacininideetione SS ercakeccicaiionas’

I a cian ae 2

Specification of Errors 7

Argument

Question Presented ....... .............. " re

Summary of Argument ea EE,

I. A Corporation Existing Merely to Hold Title to Real Estate.

Which is in Fact, but a Mere Agent or Fiduciary For its Stock-

holder, who is the Beneficial Owner, Should be so Treated for

Tax Purposes, as in the Case of Any Agency .... vn ae

Summary of Some Board Decisions in Dummy Corpora-

tion Cases Saadeh eile iitadeakaipidghetaadicapiations . i2

It. The Opinion Below in Effect Holds, Contrary to the Many

Decisions in Similar Cases, that an Estoppel exists Against

Asserting in a Taxpayer's Favor that a Corporation is in Fact

but an Agent for its Stockhoiders. This Holding is Unwar-

ranted, especiaily in the Face of the Board's Conclusion that

the Beneficial Interest was in the Stockholder... cae

The Board of Tax Appeals’ Factual Determination in the

Present Case has Ample Evidence to Support it, and the

Board Properly Concluded that the Gain was not Moline’s

NN I icrsicsschicisnceconninietncoeenioeeatinsein ae Tees 19

III. The Decision of this Court in Higgins v. Smith has not

Changed the Law Concerning the Agency Doctrine. and. In-

stead of Requiring Rejection of that Doctrine when Invoked

in a case like the Present. Supports the Opposite Result —.... 21

Conclusion Araben 28

TABLE OF CASES

Page

Abram’s Sons Realty Corporation. 4) B.T.A. 653. \3

Brager Building and Land Corp., U.S. v., 124 Fed. (2d) 349 25

Burnet v. Commonwealth Improvement Assn.. 287 U. 5. 415.

$3 S. C. 198, 77 Lda. 39 foe alae taal . 18-19-23

Carling Holding Corp., 41 B.T.A. 493______ 15

RS. 3 . SRR oenoenninen een eoeereer ene 12

Gregory v. Helvering. 293 U.S. 465, 55 S. Ct. 266, 79 L.Ed.

Be mat, PI iota stetcectiertiancencrnetnoneniey 24

Gulf Oil Corporation v. Lewellyn, 248 U.S. 71, 39S. Ct. 35.

| ea OL Te NRC NIE | SS

Higgins v. Smith, 308 U.S. 473. 60 S.Ct. 355, 84 L.Ed. Wo. 11-17-21

Interstate Transit Line vy. Commission, 130 Fed. (2d) 136 17

McInerney. J. A.. 29 B.T.A. 1, affirmed, 82 Fed. (2d) 665. 12

Mayer, Mark A., 36 B.T.A. 117 | cn 12

Palcar Real Estate Co. v. Commission. 131 Fed. (2d) 210... 21

Southern Pacific Co. v. Lowe. 247 U.S. 336, 38 S.Ct. 340, 62

OT Sea MCRts SUR OE MS ANI eo eter ES

Teeth Eeales Co., RTA. 365 SL ....... 12

IN THE

SUPREME COURT OF THE

UNITED STATES

No. 660

MOLINE PROPERTIES, INC, | On Writ of

Petitioner, Certiorari to the

Vv.

GUY T. HELVERING, COM-

MISSIONER OF INTERNAL

REVENUE,

United States

Circuit Court of

) Appeals for the

Respondent. Fifth Circuit.

‘

~

PETITIONER’S BRIEF

To the Honorable the Chief Justice and Associate

Justices of the United States Supreme Court:

OPINIONS BELOW

The opinions of the Board of Tax Appeals is re-

ported at 45 B. T. A. 647 (Rec. p. 19). The opinion

of the Circuit Court of Appeals is reported at 131

Fed. (2d) 388, (Rec p. 89).

JURISDICTION

This case is here upon a writ of certiorari, which

was granted March 8, 1943, to review the decision of

the Circuit Court of Appeals for the Fifth Circuit, en-

2

tered on November 7, 1942, in an income tax case in-

volving the taxable years of 1935 and 1936, in which

the Board of Tax Appeals held that respondent had

erred in determining deficiencies and penalties for 1935

and 1936, against petitioner. The Circuit Court of Ap-

peals reversed the Board’s decision. The jurisdiction

of this Court is sustained by Section 240 of the Ju-

dicial Code, as amended (U. S. Code, Title 28, Section

347), and by Section 1141 of the Internal Revenue Code

(U. S. Code, Title 26, Section 1141). The Circuit Court

of Appeals had jurisdiction under the second of these

sections, namely, Section 1141.

STATEMENT OF THE CASE

Respondent asserted deficiencies against petitioner

for 1935 and 1936 in the amount of $4,993.92 of income

taxes and $4344.95 of excess profits taxes, plus a de-

linquency penalty for 1936 of $788.35. The Board's

decision setting aside respondent’s determination (Rec.

p. 22), was reversed by the court below (Rec. p. 89;

131 Fed. [2d] 388). The correctness of the decision be-

low turns upon the question whether, as a matter of

law, certain income from the sale of four lots of real

estate in Miami Beach, Florida, was petitioner’s income

or that of its sole stockholder, Uly O. Thompson. That

question in turn depends upon whether the petitioner

(herein sometimes referred to as “Moline” ) was Thomp-

son’s agent, or stood in a fiduciary capacity to Thomp-

son; or, stated differently, whether the Board’s de-

termination that Thompson was the beneficial owner

of the lots and, therefore, that goin from their sale

was not taxable to Moline, was erroneous as a matter

of law.

Thompson, a Circuit Judge of a Florida state cir-

cuit court until comparatively recently, was also a large

holder of other Miami Beach, and Miami real estate, title

to all of which was in his name individually (Rec. p. 19:

52), except the four lots involved in this case. These.

3

which were acquired on August 17, 1920 (Rec. p. 17),

were mortgaged by Thompson, in 1923, to one William‘.

Whitman for a debt of $20,000; and in 1936 they were

subjected to a second mortgage given by Thompson to

the Miami Beach Bank and Trust Co. (herein referred to

as “Beach Bank”) to secure an additional indebtedness

of $20,000 (ibid) already existing, which was owing

te that bank (Rec. p. 35). This land did not, however,

prove profitable. In 1928 back taxes on the lots

amounted to $6,500 (ibid). The second mortgagee in-

sisted that these taxes be paid. At the time Thomp-

son was very hard pressed for money. The president

of the Bank of Bay Biscayne, Miami, (herein referred

to as “Biscayne”), parent bank of the “Beach Bank,”

one Gilman (Rec. p. 36), called Thompson in and told

him “he would have to do something about it (the

taxes) or they would have to foreclose the mortgage,”

and that if he, Thompson, would let the bank organize

a corporation, and transfer the property to the corpora-

tion, Biscayne would loan him sufficient money to pay

the taxes (Rec. pp. 33, 36). Gillman was president of

Biscayne, the parent Bank, and virtually controlled

the Beach Bank, a subsidiary of Biscayne. Thompson

was told, however, that the bank would not lend him

the money unless he authorized the bank to form the

corporation in which to place title to the property,

and that when the corporation was formed he would

have to hypothecate the stock to Biscayne to secure

the tax money loan, and would have to give a voting

trust to some bank officer to vote all of the stock at

any time they saw fit (Rec. p. 36).

Thompson agreed (Rec. pp. 33, 36). and the bank

had its attorneys organize the corporation (Rec. p. 33).

The first minutes and corporate papers were brought

to Thompson’s office, and he signed them (Rec. p. 36).

He testified, without contradiction, that that was the

way the corporation Moline (the petitioner herein)

was formed, and that “it was purely a receptacle to

hold the title to this property in order to get the bank

4

to loan that money, to take care of the taxes.” ( Rec.

P.J J The stock was issued to Thompson, and it was

tfrned over to Biscayne, and the voting trust was

created in favor of that bank (Rec. p. 37). Moline

assumed the two mortgages to Whitman and the Beach

Bank (Rec. p. 37), but Thompson was uever relieved

of personal liability, and remained liable on both (Rec.

p. 37). The reason for the assumption by the corpora-

tion, Moline, of these mortgages was explained as be-

ing the bank’s insistence on the privilege of the right

to apply all proceeds from the sale of the collateral

to the liquidation of the two moragages (Rec. p. 38).

Biscayne closed in 1930 and its powers under the

voting trust were thereafter exercised by the liquidator

of the bank (Rec. p. 18). The general arrangement made

in 1928, 1s already outlined, continued until 1933, when

Thompson managed to raise the funds necessary to

obtain a discharge of the obligations to the banks.

Neither during this period, nor subsequently, did Mo-

line ever keep any books of account or maintain a

bank account at any time during its existence (Rec.

p. 19). It never owned any assets except the four lots

in question. It never had any office, place of business

or employees, and except as herein stated it never

transacted any business. It paid no salaries.

While the above arrangement was in effect, Thomp-

son continued subject to Biscayne’s dictation. Three

matters referred to in the findings, belonging to this

period, bear somewhat upon the question of the agency-

fiduciary status of Moline which the Board found to

exist, and incidentally illustrate Thompson’s complete

subserviency to the bank.

The first of these was a suit, brought in Moline’s

name, but at the bank’s insistence and direction, to

remove certain restrictions imposed by a prior deed on

the land. Thompson was not even consulted about the

matter (Rec. p. 41); but he did, before Moline was

5

formed, authorize bringing the suit (ibid). Expenses

which included a fee of $5,000 which the bank agreed

to pay the lawyers (ibid), Thompson knew would be

charged against him (ibid). He made payments to

that firm from time to time, beginning in 1933, and the

bank also made some payments for his account (ibid).

The Board included in its findings a recital that in

1933 he had personally paid $4,005.39 in this connection

(Rec. p. 18). No part of these fees were paid by Mo-

line, for it never had any funds.

The second of the transactions to which the find-

ings refer is one of October 1, 1929, whereby Moline

appeared to have purchased from Biscayne a note of

Thompson’s in the sum of $43000.00 on which inter-

est of $2703.14 was due, in consideration of Moline’s

note for the purchase money, securing it with Thomp-

son’s mortgage (Rec. p. 18). This transaction, which

wa» fraudulently procured at the instance, apparently,

of questionable juggling of Biscayne’s affairs by some

of its bank officials (Rec. pp. 42 ff), was covered by

minutes (Exhibit 1, Rec. p. 71; p. 42) prepared by the

bank’s personnel, which falsely recited Thompson's

presence at the meeting, although he was not there in

fact (Rec. p. 43). This or similar transactions appear

‘o have caused the bank officials to be indicted (Rec.

p. 44). It is not of great importance to the present

case; but it iliustrates the bank’s control of the pe-

titioner and Thompson’s lack of independent volition.

The remaining matter referred to in the findings

relates to certain condemnation proceedings during the

Same period, in which Moline, as record owner of the

land, was a nominal party defendant. In connection

over to one of Thompson’s creditors (Rec. p. 48). A

reference to this matter appears in the falsge minutes

y mentioned, but Thompson said he would not

_ 4

6

want to be bound by that minute and did not know

where the money went (Rec. p. 48).

All the encumbrances on these lots were liqui-

dated on July 29, 1933, with funds obtained by a loan

negotiated by Thompson with the National Investment

Holdings, Inc., secured by a mortgage on part of the

property in question (Rec. p. 18). Checks representing

proceeds of this mortgage to National Holdings were

made payable to Thompson (Rec. p. 40). This new debt

was repaid in 1936 through the sale of property. After

the debts due the bank were liquidated, the stock con-

trol of Moline was returned to Thompson.

After 1933 and until the sale of the lots, the only

other matter bearing upon the present case was a lease,

in 1934, of a part of the real estate for a parking lot,

from which $1,000 was received (Rec. p. 19). Although

it does not affirmatively appear from the record in

whose account this rent money was deposited, it is,

especially in view of the Board’s general conclusion

that Thompson was the beneficial owner, a fair infer-

ence from the fact that Moline had no account and

from the entire testimony, that this relatively small

sum was collected by Thompson personally.

In 1934, 1935 and 1936 the lots were sold in three

separate parcels. The income sought to be taxed to

Moiine consists of the profit from the 1935 and 1936

sales. The proceeds were received by Thompson and

deposited in his own bank arcount (Rec. pp. 19, 45).

Thompson, who knew nothing about income taxes

and never made out a return in his life ,and whose

salary as a state judicial officer during this period was

not subjected to federal income taxation, employed an

auditor to make out his returns (Rec. p. 45). The

1934 and 1935 sales were reported by the corporation,

the presefit petitioner, in a corporation tax return,

erroneously under the decision herein by the Board of

7

Tax Appeals. In 1936 ThompSon’s auditor iearned of

the Board’s decision in the Forshay case, 20 B. T. A.

537 ‘Rec. p. 56. and suggested to Thompson that Mo-

line was but a “dummy” corporation (ibid): and on his

advice a refund claim was filed for 1935, and, on De-

cember 2, 1938, a delinquent personal return was filed

in which Thompson reported the 1935 gain as his in-

dividual gain (Rec. p. 19). The 1936 sales were re-

ported by Thompson personally, no return being filed

by Moline for that year The Commissioner assessed

an additional tax for 1935 ‘on grounds not here ma-

terial}, assessed a deficiency for 1936 against Moline,

and assessed against it the statutory delinquency pen-

alty. Both these deficiencies, and the penalty, are bot-

tomed on the formal separate entity of Moline, and the

premise that the cain was not Thompson's but Moline’s

gain.

There is not the slightest suggestion that the cor-

poration was formed for tax avoidance purposes, nor

to protect Thompson against his personal liabilities.

On the contrary, Thompson's personal obligation con

tinued at all time, and, when Moline was organized,

possible tax problems appear not to have been con-

sidered at all.

The Board of Tax Appeals, basing its decision

squarely on the facts (Rec. p. 20), concluded that

Thompson was the beneficial owner of the lots, and

ente¥ed a decision of no deficiency | Rec. p. 21'. The

Circuit Court of Appeals reversed. It is the latter de-

cision which is here for review.

SPECIFICATION OF ERRORS

The Court below erred in the following respects:

1. In holding that the employment of the cor-

porate form was at Thompson's election.

8

2. In treating Thompson as estopped to assert that

petitioner was a mere “dummy” corporation.

3. In failing to hold that on the facts petitioner

was a mere agent, or fiduciary for Thompson, the bene-

ficial owner.

4. In failing to uphold the Board’s factual de-

termination that Thompson was the beneficial owner

of the lots.

5, In failing to uphold the Board’s factual de-

termination that the gain from the sale of the iots

was not that of the petitoner, Moiine.

6. In holding that as a matter of law the gains

were taxable to Moline.

7. In reversing the decision of the Board of Tax

Appeals in favor of petitioner.

ARGUMENT

QUESTION PRESENTED

The specific question for determination on the pres-

ent record is whether as a matter of law the gain from

the sale of real estate, title to which was in Molinc’s

name, is taxable to Moline or to Moline’s sole taxpayer

and stockholder, Thompson, whom the Board found to be

the beneficial owner of the real estate sold. Stated differ-

ently, and in the language of the petition herein | Peti-

tion, p. 6', the question is whether Moline, and Thomp-

son, are estopped, as a matter of law, from asserting

disregard of the corporate entity, and that Moline should

be treated as a mere agency or instrumentalit’, and

ignored for taxation purposes.

9

STATUTES INVOLVED

The statutes involved, set out, infra, in the appen-

dix, are:

Section 13‘a:, and 52 of the Revenue Act of

1934, ch. 277, 48 Stat. L. 680, and Sections —

13‘b), 22(a:, and 52 of the Revenue Act of

1936, ch. 690, 49 Stat. L. 1648.

SUMMARY OF ARGUMENT

A corporation, although not ipso facto, an agent

for its stockholders. may nevertheless be in fact such

an agent; and where the facts evidence such agency,

it should for tax purposes be treated as an agent, just

as in any agency situation, even though its principal

is a stockholder, or sole stockholder.

The Board of Tax Appeals has on numerous oc-

casions, where the facts are like those of the present

case, treated the corporation as “a mere figmentary

agent” which should be “disregarded” for tax purposes.

Whether in such cases ‘some of which are summarized

in the argument) the corporate entity is to be con-

sidered as “disregarded,” or the corporation's existence

is to be “regarded” but the corporation recognized as

being the agent which it is in fact, the result in such

cases is sound, compels the taxation of income to him

whose income it is, and precludes taxation of income to

a party not beneficially the owner of it.

The opinion below summarily rejects the princi-

ple applied by the Board, that where a corporate agency

for a stockholder is, on facts such as are here present,

found to exist, income should be taxed to the bene-

ficial owner. In so doing the court below misconceived

the effect of this Court’s decision in Higgins v. Smith,

and followed the Eiehth Circuit’s erroneous applica-

tion of that decision in the Interstate Transit Lines

case.

10

In the present case the individual principally ir-

terested in the result is not, in order to avoid the tax

congeqeunces of his own chosen methods of business

organization, disavowing that organization. What is

claimed is that, in the absence of some other element of

estoppel, an agency relationship shown by the present

record to be actually existing be given effect for tax

purposes, just as would be done in the case of corporate

agency where the principal is not a sole or controlling

stockholder.

The Board of Tax Appeals treated the facts proved

in the present record as establishing an agency with

respect to real estate beneficially owned by t le

stockholder. This factual conclusion not only was,Wrong

as a matter of law, but was the only factual conclusion

possible under the evidence, unless, as a matter of law,

there is an estoppel against claiming that such evi-

dence establishes the existence of the agency relation-

ship. There is no such estoppel. Giving effect to the

relationship accords with realities, and results in tax-

ing the income to the party beneficially entitled to it.

The decision in Higgins v. Smith was one in which

a tax payer was not permitted for tax purposes, to avail

himself of his own corporate creature, which he him-

self created and used in other situations for tax avoid-

ance, There was a jury verdict adverse to the tax-

payer, not, as here, a favorable factual determination

by the trier of the facts. The dicta relied on as over-

throwing the line of authorities supporting the present

petitioner's position merely declare that the tax disad-

vantages of the corporate form of conducting business

cannot be disavowed by one who has deliberatly chosen

that form. The dicta did not, however, make a change in

the law of trusts or of agency, or preclude claiming

that the corporate creature is in fact an agerffif such

is the fact.

11

The court below has in effect reversed the Board

of Tax Appeals on a fact determination amply sup-

ported by the record, and has done so because it ig-

nored or overrode, without challenging, finding of fact

by the Board, and because of a misconception of the ef-

fect of the decision in Higgins v. Smith. Its decision

should therefore be reversed, and the Board's decision

reinstated.

A CORPORATION EXISTING MERELY TO HOLD

TITLE TO REAL ESTATE, WHICH IS IN FACT

BUT 4 MERE AGENT OR FIDUCIARY FOR ITS

STOCKHOLDER, WHO IS” THE BENEFICIAL

OWNER, SHOULD BE SO TREATED FOR TAX

PURPOSES, AS IN THE CASE OF ANY AGENCY.

Until the recent decision of this Court in Higgins

v. Smith, 308 U. S. 473, 60 S. Ct., 355, 84 L. Ed. 406,

it had been frequently held that a corporation which,

to borrow the Board’s language in its opinion in the

present case, exists merely to facilitate the passage

of title to rea! estate, whose stockholders act without

regard for its entity, is a “mere figmentary agent

which should be disregarded in the assessment of

taxes taxes.” Perhaps it is not strictiy accurate to

refer to the result in such cases as one which “disre-

gards” the entity. The separate entity is in a sense

respected but recognized for what it is, a mere agent

cr fiduciary, and therefore the same tax consequences

follow as in the case of any corporate agent or fiduciary,

Whether or not acting for the owners of its stock.

Whether this a characterized as “disregarding” the en-

tity or amounts merely to viewing the entity in its.

proper perspective, and giving it its true significance

a8 a mere agent, is not important so far as the result

is concerned. The latter concept, that the entity con-

stitutes a mere agen‘, does no violence to the elemen-

tary rule of the separate fictional existence of the

Corporation. Language used in the decisions sometimes

is to the effect that the separate ertity may in some

12

circumstances be “disregarded.” sometimes terms the

subsidiary entity as an ‘agent,’ and sometimes sug-

gests a confusion of both concepts.

A corporation is, of course, not ipso facto, the agent

of its stockholders. It is a separate entity. But a cor-

poration which is acting as agent for a stockholder,

even a sole stockholder, is note the less an agent, even

if its principel happens also to be its sockholder. While

the fact of stock ownership, standing alone, does not

create the relation of agency, yet the reverse is also

true. The fact of stock ownership does not, ipso facto,

negative the agency relationship.

Summary of some Board decisions in dummy

corporation cases.

Some Board decisions, cited in its opinion in the

present case, afford practical examples of “dummy”

corporations that in fact were agents. and were so

treated for tax purposes. These cases are recognized

as not binding here, but are referred to as supporting

the present petitioner's contention, and as illustrating

a correct application of the law to similar factual

situations.

In the present case the Board, saying (Rec. p. 21)

that it had “frequently” regarded a corporation that

is a mere holder of title as ‘“‘a mere figmentary agent,”

“disregarding” the entity “to effect a more realistic

assessment of taxes” | Rec. p. 21:, cited five of its own

prior decisions, one of which was the subject of an

appeal which was upheld. These are:

Stewart Forshay, 20 B. T. A., 537.

J. A. McInerney, 29 B. T. A. 1. affirmed 82 Fed.

(2d) 665.

Thrift Realty Co., 29 B. T. A. 545.

Mark A. Mayer, 36 B. T. A. 117.

13

Abram’s Sons Realty Corporation, 40 B. T. A.

653.

The Forshay case, referred to in the record as the

decision which occasioned Thompson's auditor to sug-

gest that Moline was but a “dummy,” was one in which

persons interested in a corporation which owned aa

apartment building in New York City changed the

form of the enterprise and created a new corporation

to hold the property, which, instead of operating the

enterprise as had the former corporation, would merely

hold title for the benefit of “the persons in interest.”

Provision was made, in the instruments embodying the

entire arrangement, that earnings would be distributed

in fixed amounts annually, and for the distribution of

the proceeds upon a sale of the property. These and

other features of the arrangement ‘which was “vol-

u.tary’ in the real sense, not as here an arrangement

imposed by a creditor upon a debtor) were regarded

by the Board of Tax Appeals as making it evident

that the corporation did not take title on its own be-

half or for its own benefit, but for that of the parties

in interest. After referring to and quoting from cer-

tain New York statutes on the subject of Trusts, and

Saying that it made no difference whether a passive

trust. a power in trust, or a mere agency was created,

the soard concluded that in either case no estate or

interest vested in the corporation, but the parties in

interest took both legal and equitable title. Any in-

come therefrom was that of the latter, not of the

corporation.

In the McInerney case, the Board and Circuit Court

of Appeals for the Sixth Circuit treated a similar cor-

porate entity, which was, on the facts, a mere conduit

for passing title, as of no effect to enable the taxpayer

to avoid the consequences that payment by the pur-

chaser for property thus transmitted was constructive-

ly received by the stockholder.

14

In the Thrift Realty Co. case, the Board on con-

siderably stronger facts in favor of the taxing officers

than those of the present case treated a similar cor-

poration as a mere trustee for stockholders at the time

certain real estate standing in its name was sold, and

said in this connection that the fact that the taxpayer

was a corporation in which the individuals affected

owned all the stock “does not affect the status of

agency.”

In the Mayer case the Board delt with the ques-

tion whether the net loss of a partnership should in-

clude income and deductions of a corporation whose

stock was all owned by the partnership. The latter

owned considerable real estate which it used in its

regular business. Long before the income tax laws

were passed it had organized a corporation for the

sole purpose of holding title to the real estate which

was transferred to the corporation. Title to real estate

thereafter acquired was taken in the corporation’s

name. Otherwise the corporation transacted no busi-

ness. It kept no books, and never had an office, em-

ployees, agents or a bank account. Receipts were col-

lected by the partnership and expenses were paid by

it, and it dealt with the lands as if it, not the cor-

poration, held legal title. The purpose of organizing

the corporation and continuing its existence was for

convenience in handling property, including conveying

title, and avoidance of title complications in case of a

partner’s death. The Board, after recting that ordi-

narily corporations have a separate existence apart

from their stockholders, yet recognized that it, and

the courts, had looked through the form and regarded

substance “where the facts were peculiar,” for which

proposition there were cited, among other cases, this

Court's decision in Southern Pacific v. Lowe, 247 U. S.

330, 38 S. Ct. 340, 62 L. Ed. 1142, and Gulf Oil Cor-

poration v. Lewellyn, 248 U. S. 71, 39 S. Ct. 35, 63

L. Ed. 133. Upon a consideration of the facts the Board

concludeg dthat the partnership, not the corporation,

r-

ae ae

15

was the beneficial owner of the land, and that there-

fore receipts and disbursements were the partnership’s,

not the corporation’s.

The Abram’s Sons case resembled the present one

in that the corporation was organized at the demand of

creditors, to hold record title to certain real estate,

and to receive, for creditor interests, the proceeds of

a condemnation proceeding. Unlike the present case,

the equity owners realized nothing after application

of the proceeds. The Board treated the corporation as

a mere trustee or agent to dispose of the property

and act as a conduit and distribute the proceeds for

creditors. Under these circumstances and on the au-

thority of the Forshay case and other Board cases,

the gain was held not taxable to the corporation.

The above cases were, it is submitted, correctly

decided, and their reasoning a: i logic were correctly

applied by the Board in the pr«sent proceeding (Rec.

p. 11). To borrow the Board’s reasoning in another

Board decision, Carling Holding Corp., 41 B. T. A. 493,

if the contest were between the corporation (in this

case, Moline, the petitioner herein) and those for whom

it was acting, instead of a tax case, neither the cor-

poration, nor the voting trustee, nor the Biscayne,

could have contended that any profit belonged, as

against Thompson, to Moline; for, in the Baord’s lan-

guage, so to hold “would be a travesty upon the law

of agency or trusteeship.” 41 B. T. A. 493, at p. 503.

There are other decisions to the same effect, some

of which are cited in the Board’s opiniens in the cases

just mentioned. These cases properly insisted that in-

come should be taxed to the party who or which is

beneficially interested in such income, not to a mere

formal holder of the title to property from which the

income is derived, or to a mere agent or fiduciary not

in fact beneficially interested. Such appears to have

16

been the generally accepted rule in cases of this kind.

The opinion below appears to be the first case in-

volving such a fact situation in which a corporation

holder of formal title to real estate which is a mere

shell, or “figmentary agent,” has been held taxable on

income or gain from property where the beneficial in-

terest is in the stockholder.

THE OPINION BELOW IN EFFECT HOLDS, CON-

TRARY TO THE MANY DECISIONS IN SIMILAR

CASES, THAN AN ESTOPPEL EXISTS AGAINST

ASSERTING, IN A TAXPAYER’S FAVOR, THAT A

CORPORATION IS IN FACT BUT AN AGENT FOR

ITS STOCKHOLDERS. THIS HOLDING IS U%N-

WARRANTED, ESPECIALLY IN THE FACE OF

THE BOARD'S CONCLUSION THAT THE BENFE-

FICIAL INTEREST WAS IN THE STOCKHOLDER.

The opinion below, ignoring or misconceiving the

testimony, treats this subject summarily, on the sup-

posed authority of Higgins v. Smith, and of the /nter-

state Transit Lines decision by the Eighth Circuit, now

on review in this court.

The opinion of the court below is an example of

the extreme in oversimplification. After reciting the

facts, the bare assertion is made that the Board “erred

in its decision.” The general rule is cited that a cor-

poration and its stockholders are for purposes of taxa-

tion different entities; and then the Board’s findings

and conclusions of fact, ‘abundantly supported by the

record, which could permit of no other findings or con-

clusions of fact), and its opinion, were disposed of in

five short sentences ‘Rec. p. 91; 131 Fed (2d) 388 at

p. 389:. It is declared that Thompson “for reasons

satisfactory to himself and his creditors elected to em-

ploy a corporation” (thus ignoring the complete lack

of any real volition or freedom on Thompson's part.

and, in spite of the abundant evidence to the contrary.

treating Thompson as having a free choice in the mat-

17

ter, when his only choice was surrender to the credi-

tor’s demand or loss of his property); and then, upon

the postulate that Thompson had “chosen the cor-

porate form to conduct these affairs,” the Opinion says

that both he and the corporation “must accept the tax

disadvantages,” and “may not now. in order to escape

corporate taxes, be heard to disavow the corporate ex-

istence and allege that the respondent ‘in the court

below, petitioner here: was merely a “dummy corpo-

ration.”

Not a word is said concerning the legal conse-

quences cf the Board’s conclusion that it was Thomp-

son who had beneficial cwnership. Thus is it in effect

declared that an estoppel existed against proving that

the corporation was in fact but an agent, although in

any other situation where the relationship of agency

exists there would be no doubt that gain would be taxed

to the beneficially interested party, not to the agent.

For this remirkable and, we submit, clearly errone-

ous pronouncement, at least as applied to the facts

proved of record and found by the Board, the court be-

low cited two authorities, this Court’s decision in Hig-

gins v. Smith, 308 U. S. 473, 60 S. Ct. 355, 84 L. Ed.

406, and the Eighth Circuit’s decision in Interstate

Transit Lines v. Commissioner, 130 Fed. (2d) 136.

The Interstate Transit Lines opinion and the opinion

below both overlook the significance of the fact of

agency.

The Interstate Transit Lines opinion, after refer-

ring to Southern Pacific v. Lowe, 247 U. S. 330, 38 S. Ct.

540, 62 L. Ed. 1142, and Gulf Oil Corporation v. Lewel-

lyn, 248 U. S. 71, 39 S. Ct. 35, 63 L. Ed. 133, and some

Circuit Court of Appeals decisions cited by the tax-

payer in that case in support of the “agency” conten-

tion, says (130 Fed. [2d] 136 at p. 140) that these cases

“cannot be regarded as laying down any general rule

authorizing disregard of corporate entity in respect of

18

taxation,” for which assertion Burnet v. Commonwealth

Improvement Corp., 287 U. S. 415, 53 S. Ct. 198, 77

L. Ed. 399, is cited. The Eighth Circuit opinion then

cites Higgins v. Smith, from which is quoted the dictum

that ‘a taxpayer is free to adopt such organization for

his affairs as he may choose and having elected to do

some business as a corporation, he must accept the dis-

advantages,” but that the Government “may sustain or

disregard the effect of the fiction as best serves the

purpose of the tax statute.”

The quoted language, for which presumably the

Court below in the present case cited the Interstate

Transit Lines case, loses sight of the fact that the tax-

payer in a proper case of this kind is not contending

that he should be relieved of the consequences of his

own chosen method of doing business. He is asking

that the fact of the agency relationship be recognized

and that the usual consequences of that relationship

be given effect. This oversight may be a result of some

of the loose language that has appeared in the books

to the general effect that in certain situations “the cor-

porate entity will be disregarded.” Whether or not the

“dummy corporation’s” fictional entity be “disre-

garded,” the same result should follow that would fol-

low in the case of an actual agency where the principal

is not the agent’s stockholder. Unless there be some

other element of estoppel present, ownership of cor-

porate stock does not estop the owner from establishing

an agency relationship, if such in fact exists. Authori-

ties where the “agency” doctrine has been applied have

treated facts like those here presented as evidencing

agency.

Because the brief in the Interstate Transit Lines

case now pending in this Court (Docket No. 552) dis-

cuss the hole ings of this Court in Southern Pacific Co.

v. Lowe, 242 U. S. 330, 38 S. Ct. 540, 62 L. Ed. 1142,

and Gulf Oil Corporation v. Lewellyn, 248 U. S. 71, 39

S. Ct. 35, 63 L. Ed. 133, and also Burnet v. Common-

19

wealth Improvement Corp., 287 U. S. 415, 53 S. Ct.

198, 77 L. Ed. 399 (which is plainly distinguishable),

the present petitioner will omit discussion of these au-

tthorities. The discussion of them in the petitioner’s

brief in the Interstate Transit Lines case (No. 552 on

this Court’s docket! is adopted in this petitioner's be-

half.

The Board of Tax Appeals’ factual determina-

tion in the present case has ample evidence

to support tt, and the Board properly con-

cluded that the gain was not Moline’s but was

Thompson's.

The Board of Tax Appea’s treated the facts proved

in this case as establishing the “agency” of Moline in

respect of property beneficially owned by Thompson. It

is submitted that the Board's factual conclusions were

the only ones possible under the uncontradicted testi-

mony in the present record, and that a contrary conclu-

sion would have constituted an error of law, and would

have been without any evidence to support it; but how-

ever that may be, the Board did find that Thompson,

not the corporation taxpayer, the present petitioner,

was the beneficial owner. The Court below, rejecting

this conclusion, or at any rate ignoring it, has either:

decided that as a matter of law it can never be con-

cluded that such facts as here exist establish a cor-

poration’s agency for its sole stockholder, so that in

effect there is an estoppel against claiming the benefit

of the true relationship; or, has, in spite of this Court’s

many pronouncements on the subject, disturbed, with-

out direct challenge of the correctness thereof, a factual

determination of the Board, abundantly supperted by

the evidence, and has done so under the guise of a

holding that the Board has erred in applying the law.

Thompson owned other extensive real property in

Miami (19). from which circumstance it may be in-

ferred that he was engaged generally in the business

20

of dealing in real estate. He did not, however, employ

the corporate form in the handling of this business.

Had he in effect operated the business of dealing in real

estate through the medium of a corporation actually

and actively conducting the business, then the owner-

ship of all the stock would not, without more, have made

has corporation’s gain his gain. As applied to situa-

tion like that, it may be correct to say that a taxpayer

thus conducting his affairs must accept the tax dis-

advantages. That is not the present case. Thompson.

at a creditor's insistence and demand, acquiesced in the

use of a corporation to hold title to some of his real

estate. The instigator of the organization of the corpor-

ation was the bank, not Thompson. It was the bank's.

not his, purpose that was served, aside from the fact

that he thereby avoided the harsh alternative of loss of

the property. After he regained control, in 1933, he did

not, it is true. immediately dissolve the corporation or

transfer record title back to himself but he dealt with

the property as his own. He had no purpose of tax avoid-

ance. (Indeed, the contrary is the case, as the present

proceeding demonstrates.! His and the corporation's

non-action with respect to the record title did not

change the fiduciary relationship which the Board Ge-

termined to have existed. under which Moline, the rec-

ord owner, merely held title for Thompson, the bene-

ficial owner. If he was the beneficial owner then it

follows that Moline was a fiduciary. Whether Moline

be termed “fiduciary” or “agent” is not important.

What is important is that the property, and therefore

the gain from its sale, was not Moline’s, any more than

in the case of a sale by any agent or fiduciary of his

principal's or his beneficiary’s property.

21

as

THE DECISION OF THIS COURT IN HIGGINS V.

SMITH HAS NOT CHANGED THE LAW CONCERN-

ING THE AGENCY DOCTRINE, AND, INSTEAD OF

REQUIRING REJECTION OF THAT DOCTRINE

WHEN INVOKED IN A CASE LIKE THE PRESENT,

SUPPORTS THE OPPOSITE RESULT.

The Court below, and the Eighth Circuit Court of

Appeals' in the Interstate Transit Line case, have

treated this Court’s well known decision in Higgins v.

Smith, 308 U. S. 473, 60 S. Ct. 355, 84 L. Ed. 406, as in

effect holding that the Government, in a tax case, may

at will “disregard” the corporate entity, while the tax-

payer may under no circumstances assert the existence

of an agency relationship. If these courts are :ight in

thus construing Higgins v. Smith, the one sided situa-

tion thus resulting respresents a somewhat startling

change in what has heretofore been generally assumed

to be the law applicabie to these cases.

In that case Smith sued Higgins, the Collector of

Internal Revenue, for a refund of taxes. The question

was whether the taxpayer was entitled to deduct a loss

arising from the purported saie of securities by him

to his wholly owned corporation, Officers and Directors

of the corporation were Smith’s subordinates. Its trans-

actions were carried on under his direction and were

largely restricted to operations in buying securities

from or selling them to the taxpayer. This Court, in

the opinion, termed the corporation Smith’s “corporate

self.” It was created to gain income and estate tax sav-

ings for Smith, and thus was an attempted tax avoid-

ance device. Under these circumstances this Court held

that the Second Circuit Court of Appeals had erred in

1. That court's recent decision in Palcar Real Estate Co. v. Commissioner,

13) Fed. (2d) 210, is clearly distinguishable on the facts from the present case.

and contains language apperentiv recognizing the difference between an active

corperation and “a mere passive holder of the ttle” The case does, however

regard the language of Higgins ». Smith as c:4 the court below

99

Ae

reversing and remanding a District Court judgment,

rendered pursuant to a jury verdict, in favor of tae

Collector. The trial court gave an instruction, which

this Court approved, that the jury were to find whether

the sales by Smith to the corporation, out of which grew

the asserted ‘oss, were actual transfers of property

out of Smith into something that existed separate and

apart from him, or to be regarded as simply a transfer

by Smith’s left hand “being his individual hand, into

his right hand, being his corpvrate hand, so that in

truth and fact there was 10 transfer at all.” The jury

took the latter view and brought in a verdict for the

Collector. This Court not only said there was sufficient

evidence to sustain the verdict. The opinion goes fur-

ther and adds that “this domination and control is so

ohvious in a wholly owned corporation as to require

a peremptory instruction that no loss in the statutory

sense could occur upon a sale by a taxpayer to such an

entity.”

It was said that “there is not enough of substance

in such a sale finally to determine a loss.” Stated in

another way, it may be said that after the transaction

in question Smith was neither richer nor pooer than

he had been before.

The opinion refers to what is termed “the natural

conclusion that transactions, which do not vary, con-

trol or change the flow of economic benefits, are to be

dismissed from consideration.” That in effect states

one contention of the present petitioner; for, in the

succeeding language of the opinion, “the purpose here

is to tax earnings and profits less expenses and losses,”

but “if one or the other factor in any ‘calculation is

unreal, it distorts the liability of the particular tax-

payer to the detriment or advantage of the entire tax-

paying group. (Italic ours.) If an “unreal’’ factor can

work to the “advantage of the entire tax-paying group"

it is because the particular taxpayer is overtaxed as 4

result of the “unrea!” factor. That is the situation here.

23

It is ‘unreal’ to treat Moline as the owner of the lots.

If a taxpayer is not permitted to show the fact of such

“unreality,” then the word “advantage” in the Higgins

v. Smith opinion is meaningless. The reference tc “‘det-

riment or advantage” negatives the view that a one-

sided rule was being announced.

The opinion then refers to Burnet v. Commonwealth

Improvemen: Co., 287 U. S., 415, 53 S. Ct. 198, 77 L. Ed.

399, which had been cited by Smith in support of his

contention. That case involved the converse situation:

but in that case there was also an element of tax avoid-

ance. The principal stockholder there had used the cor-

poration to reduce taxes, and later, when it was to his

advantage in order to avoid subjection of the corpora-

tion to a tax on a sale of corporate stock by the cor-

poration to the stockholder, the claim was made that

the corporation and stockholder were one. This Court

in that case required observance of the corporate en-

tity created originally to reduce taxes, but expressly

recognized that the entity might be disregarded in a

taxpayer’s favor under “peculiar circumstances.” That

case did not present any question of agency, and the

interested parties had in the past obtained substantial

tax benefita from the corporation’s existence.

It was in the course of commenting on the Com-

monwealth Improvement Co. case, and with direct ref-

erence to that case, and by way of distinguishing that

case, that this Court then gave utterance to the dicta

now relied on in order to base taxes on what are in fact

unrealities. When the dicta are quoted for this pur-

pose certain phrases are usually taken apart from their

context, and given improper emphasis that disappear

when the entire text is read. The full quotation is:

“In the Commonwealth Improvement Co,, case,

the tax payer, for reasons satisfactory to itself,

voluntarily had chosen to employ the corpora-

tion in its operation. A taxpayer is free to

24

adopt such organization for his affairs as he

may choose and having elected to do so some

business as a corporation, he must accept the

tax disadvantages. (Italics ours.)

“OrfJhe other hand, the government may

not be required to acquiesce in the taxpayer's

election of that form for doing business which

is most advantageous to him. The govern-

ment may look at actualities and upon determ-

ination that the form employed for doing busi-

ness or carrying out the challenged tax event

is unreal or a sham may sustain or disregard

the effect of the fiction as best serves the pur-

pose of the tax statute. To hold otherwise

would permit the schemes of taxpeyers to su-

pe:cede legislation in the determination of the

time and manner of taxation. It is command

of the income and its benefits which marks

the real owner of the property.”

It is, therefore, seen that this language, viewed

in the setting which was the occasion of it, is directed

against “schemes” of tax avoidance of which the Com-

monwealth Improvement Co. case was an example, and

with direct reference to that very case, and is not 2

sweeping generalization for application in all cases, in-

cluding those of agency. No mention is made of agency

situations. The quoted language is used to support the

conclusion, in a case in which there had been a de-

termination by the triers of fact that a transaction

was a sham, that the government is not bound by that

sham. In other words the taxpayer went through cer-

tain motions, but, as in Gregory v. Helvering, 293 U. S..,

465, 55 S. Ct. 266; 79, L. Ed. 596, 97 A. L. R. 1355, which

is also cited, he did not actually do what he attempted

to do.* On the other hand, where, as in the Common-

wealth Improvement Co. case, the taxpayer employs the

coroprate device and there is no agency situation, and

especially where he thereby reduces taxes, he may not

be heard later to disavow his own creature, voluntarily

25

created, (Moline was forced upon Thompson) when

it is to his advantage so to do.

To give the quoted language in Higgins v. Smith

the effeet claimed for it would nuuify the preceding

language in the same opinion, which recognizes that

“unreality’’ (as distinguished from sham) may work

either way. The case of Riggins v. Smith not only

does not support the opinion of the court below; it

lends strong support to the petitioner, and to the

Board’s decision.

The Fourth Circuit Court of Appeals in U. S. v.

Brager Building and Land Corporation, 124 Fed. (2d)

349, quotes in full the above language from Higgins v.

Smith, and then points out, in response to the Commis-

sioner’s argument, that “the diversity of business trans-

actions in corporate form does not permit of so easy a

generality” as that asserted by the Commissioner. The

language in the Brager opinion, criticizing the “easy

generality” of government's contention is equally ap-

plicable to the >versimplification indulgec in by the

Court below.

The Brager opinion recognizes that “schemes” to

escape taxation will not be tolerated; but continues

by saying that “it is going too far to say that if a tax-

payer forms a corporation for his convenience, he is

thereafter estopped from disclosing the true nature of

the arrangement, whenever it is of advantage to the

government to recognize only the corporate form.” Ref-

erence in succeeding sentences to cases dealing with the

situation “when a corporation has been formed merely

as an agency to hold title to real estate for the con-

venience of the owner” makes it clear that what is

meant is that if “the true nature of the arrangement”

is an agency, the usual result must follow. It is sub-

mitted that the Brager opinion correctly construed the

language and holding in Higgins v. Smith and that to

quote again from the Brager opinion, the “body of the

26

law” relating to agency situations of the present sort

cannot be regarded as having “now for practical pur-

poses ceased to exist.”

As tne Brager opinion points out, the opinion in

Higgins v. Smith does not preclude assertion, in such

cases, of the fact of the agency reiationship. The latter

opinion is a warning agairst “schemes” of taxpayeis

to avoid, through corporate devices, taxes they real!y

owe if economic realities are given effect. While it is

true that a taxpayer’s intent lawfully to minimize his

taxes does not render unlawful what is otherwise law-

ful, yet a taxpayer who attempts a transparent

“scheme” or device of the kind under scrutiny in Hig-

gins v. Smith risks one of two consequences: if, as was

the case in Higgins v. Smith, the device is a sham, the

Government may, notwithstanding the sham, apply the

philosophy of Gregory v. Helvering, supra, p. 25, and

disregard it altogether. If, however, as in the Common-

wealth Improvement Co. case, the taxpayer’s “scheme”

to reduce taxes produces, if given effect, a tax disad-

vantage, the Government may compel him to accept

these consequences of his ‘“‘scheme.”’

No such situation of attempted tax reduction is

present here. The opinion in Higgins v. Smith does

much more than condemn attempts of taxpayers to

retain the fruits of income but escape the tax on such

income. It also condemns determination of tax lia-

bility on the basis of “urrealities.”” This portion of the

opinion the court below appears to have overlooked.

When Higgins v. Smith is cited in support of the one-

sided rule contended for by respondent and apparently

announced by the court below, and by the Eight Circuit

in the Interstate Transit Lines case, no mention is made

of this condemnation of the use of an “unreal’’ factor

in calculating taxes. In the present case, Moline’s rec-

ord ownership of the iand is a necessary “factor” in

the “calculation” of the deficiencies here under review.

Such ownership is “unreal”; it is just as “unreal” as

27

the legal title held in trust for another, so far as the

question of beneficial interest is concerned; such record

ownership was merely as another’s, Thompson’s agent,

or, if one prefers the term, trustee; and the Board so

found. The court, however, reversing the Board, has

exalted the “unreal” thing, the formal title in Moline,

to become a “factor” in the “calculation” of a ruinous

tax, which, because he .s obviously a “transferee,”

Thompson, in spite of his financial troubles which the

record so clearly portrays, will be forced to meet some-

how. This, if the court below is upheld, is the only

“reality” about the result, a harsh reality which, if

allowed to stand, will represent a miscarriage of justice,

and a discrimination against Thompson. The obvious

effect would in such case be that Thompson pays more

than the tax on his gain, for he would pay at the cor-

porate instead of the individual tax rate, and in addi-

tion be mulcted in interest and penalties. Such an un-

fair discrimination is not warranted by anything in this

record. It is condemned by the language and reasoning

of Higgins v. Smith. It is contrary both tc common

sense and to the clearest dictates of justice. The gain

on the sale of these lots should, petitioner submits, be

taxed to Thompson, the real owner, not to Moline, the

mere title holder, or “agent.”

«*

28

CONCLUSION

For the foregoing reasons it is earnestly submitted

that the Court below has erred in hoiding that this

Court’s decision in Higgins v. Smith required as a mat-

ter of law the taxation to Moline of the gains from the

saie of the lots here involved, and in reversing the

Board ot Tax Appeals, and accordingly it is urged that

the decision of the Circuit Court of Appeals of the

Fifth Circuit be reversed and that of the Board of Tax

Appeals affirmed.

Respectfully submitted,

BART A. RILEY,

RE ee PARP se nacre cette

es Sa Ie ha) Wate In" -sxendoacrrenoahiaialiambasaeancomnse

Attorneys for Petitioner. Attorneys for Petitioner.

29

APPENDIX

Revenue Act of 1934, ch. 277, 48 Stat. 680:

SEC. 13. TAX ON CORPORATIONS.

(a) Rate of Tax. There shall be levied,

collected, and paid for each taxabie year upon

the net income of every corporation, * * *

SEC. 22. GROSS INCOME.

(a) General Definition. ‘‘Gross income” in-

cludes gains, profits and income derived from

* @*# @ sales, s *

SECTION 52. CORPORATION RETURNS.

Every corporation subject to taxation un-

der this title shall make a return, * * *

Revenue Act of 1936, ch. 690, 49 Stat. 1648:

SEC. 13. NORMAL TAX ON CORPORATIONS.

(@) Imposition of Tax. Tsere shall be lev-

ied, collected, and paid for each taxable year

upon the normal-tax net income of every cor-

poration, a normal tax as follows:

The provisions of Sections 22 (a) and 52 of the

Revenue Act of 1936, supra, are identical with those

set forth above.