Opinion
No. 44282.
June 2, 1941.
R.M. O'Hara, of Detroit, Mich., for plaintiff.
S.E. Blackham, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Action by Black, Starr Frost-Gorham, Incorporated, against the United States, to recover an alleged overpayment of manufacturers' excise taxes.
Petition dismissed.
Plaintiff seeks to recover $30,407.46, with interest, alleged overpayment of manufacturers' excise taxes collected under section 605, Title IV, Revenue Act of 1932, 26 U.S.C.A. Int.Rev. Acts, page 609, and section 609, Title IV, Revenue Act of 1934, 26 U.S.C.A. Int.Rev. Acts, page 786.
Special Findings of Fact.
1. The plaintiff is a corporation organized under the laws of the State of New York on June 20, 1932, with an authorized capital stock of 500 shares with a par value of $100 a share.
2. Among the purposes for which plaintiff was formed were the following, to-wit: To manufacture, buy, sell or otherwise acquire, invest, trade, exchange and deal in gold and silverware, plated ware, metalware, glassware, crockery, cutlery, leather goods, jewelry, woodenware, bronzes, porcelains, china ware, silks and cloths and all materials used in the manufacture of each, any, and all of such articles.
3. This suit is to recover manufacturers' excise taxes upon sales of jewelry covering the period from June 21, 1932, to June 20, 1936. The chief issue in this case is whether the sales to the retail trade by plaintiff of the articles of jewelry purchased by it from the 594 Fifth Avenue Corporation on June 20, 1932, referred to in finding 5, were, for tax purposes, sales by the manufacturer.
4. On the same date that plaintiff was organized, another corporation known as Black, Starr Frost-Gorham, Inc., which was the name given in May, 1929, to a corporation organized under the laws of the State of New York in March 1929, referred to in finding 7, changed its name to 594 Fifth Avenue Corporation by the filing of a certificate in the office of the Secretary of State of New York. The change in name to 594 Fifth Avenue Corporation was made to permit the incorporation under New York laws of a new company bearing the name of Black, Starr Frost-Gorham, Inc., which new company is the plaintiff.
5. On the date of its incorporation, June 20, 1932, plaintiff purchased from 594 Fifth Avenue Corporation its entire merchandise inventory of jewelry and other related articles. The sale by 594 Fifth Avenue Corporation and the purchase by plaintiff were made pursuant to authority duly granted by the directors and stockholders of the respective corporations.
The bill of sale covering the merchandise inventory was executed by 594 Fifth Avenue Corporation and was delivered to plaintiff on June 20, 1932.
In payment for this merchandise inventory plaintiff issued and delivered to 594 Fifth Avenue Corporation its entire authorized capital stock consisting of 500 shares of stock with a par value of $100 a share. The value of the merchandise inventory was fixed at the sum of $5,926,865.71 by plaintiff's board of directors.
6. June 30, 1932, 594 Fifth Avenue Corporation sold to plaintiff, and plaintiff purchased from it, all of the remaining assets of 594 Fifth Avenue Corporation. The consideration paid by plaintiff for such assets was the assumption of all the liabilities of 594 Fifth Avenue Corporation and the payment, in addition, of $532,982.21. A bill of sale of such remaining assets was delivered to plaintiff by 594 Fifth Avenue Corporation on July 1, 1932, and on October 18, 1932, 594 Fifth Avenue Corporation was dissolved. The assets so acquired by plaintiff had a value of $1,492,061.29 and the liabilities assumed by plaintiff amounted to $959,079.08.
7. 594 Fifth Avenue Corporation was organized under the laws of the State of New York on March 15, 1929, under the name of The Gorham Store, Inc. The name of said corporation was in May, 1929, changed from The Gorham Store, Inc., to Black, Starr Frost-Gorham, Inc., pursuant to a certificate filed in the office of the Secretary of State of New York. In similar manner, the corporate name was changed to 594 Fifth Avenue Corporation on June 20, 1932, prior to the sale of its merchandise inventory to plaintiff. The change in name to 594 Fifth Avenue Corporation was made for the reason stated in finding 4.
8. 594 Fifth Avenue Corporation, since it was originally organized on March 15, 1929, and doing business under names shown in finding 7, had been engaged in business both as a manufacturer and as a retailer of jewelry and related articles. Plaintiff, since the acquisition by it of the remaining assets of 594 Fifth Avenue Corporation on July 1, 1932, has likewise been engaged in business both as a manufacturer and as a retailer of jewelry and related articles.
9. All of the stock of 594 Fifth Avenue Corporation was owned by a corporation known as The Gorham Store, Inc., and it continued to own all of the stock of that corporation until its dissolution on October 18, 1932. On dissolution of 594 Fifth Avenue Corporation, The Gorham Store, Inc., acquired all of the stock of plaintiff and has owned all of that stock up to the present time.
10. During the time that 594 Fifth Avenue Corporation and plaintiff were both in existence, that is, from June 20 to October 18, 1932, both corporations had the same offices, the same officers, and the same employees generally. Upon the organization of plaintiff, a new set of books was opened to record its business transactions.
11. Title IV of the Revenue Act of 1932, which was enacted June 6, 1932, and became effective June 21, 1932, imposed a tax of ten percent upon the sale by the manufacturer, producer, or importer of various items of jewelry.
On account of the depression the old company, Black, Starr Frost-Gorham, Inc. (later on June 20, 1932, changed to 594 Fifth Avenue Corporation), was in difficulties and its business was a third of what it had been three years previously. The new tax threatened either to reduce sales by increased prices or to increase losses by absorbing the tax. To the old company, both as manufacturer and as retailer, the tax presented threatening competitive situations. This was a matter of great concern to the officers of the old company, and they consulted their accountants and attorneys who advised them that the tax could be avoided on the stock on hand by organizing the plaintiff. What followed and the background thereof are set out in findings 4, 5, 6, and 7. The welfare of the business by the avoidance of the tax was the motivating cause for organizing plaintiff corporation.
12. Plaintiff, in its monthly returns filed with the Collector of Internal Revenue for the Third District of New York, reported as subject to tax under section 605 of the Revenue Act of 1932, and that section as amended by section 609 of the Revenue Act of 1934, only the sales of merchandise which had been manufactured, produced, or imported by it following its incorporation on June 20, 1932. The tax due on such sales under the applicable Revenue Acts was shown on these returns and was duly paid to the Collector of Internal Revenue.
13. About the month of August, 1935, the Commissioner of Internal Revenue, following an investigation of the monthly returns filed by plaintiff for the period from June 21, 1932, to March 31, 1935, inclusive, assessed against plaintiff an additional excise tax of $20,707.67 on sales of jewelry during this period. The sole basis of the Commissioner's determination of additional taxes was that plaintiff was liable for the excise tax not only upon the sales of jewelry which it had manufactured, produced, or imported, but also upon the sales of those articles of jewelry acquired by plaintiff from 594 Fifth Avenue Corporation on June 20, 1932, which had been manufactured, produced, or imported by said corporation between the date of organization of The Gorham Store, Inc., on March 15, 1929, and June 20, 1932. The additional tax of $20,707.67, plus interest thereon of $5,111.94, was paid by plaintiff to the Collector of Internal Revenue under protest on November 23, 1935.
14. About the month of July, 1936, the Commissioner of Internal Revenue, upon the same basis as is set out in finding 13, assessed against plaintiff an additional excise tax of $3,976.19 on sales of jewelry from April 1, 1935, to January 31, 1936, inclusive. This additional tax, together with interest of $173.40, was paid by plaintiff to the Collector of Internal Revenue under protest on July 15, 1936.
15. About the month of November 1936, the Commissioner of Internal Revenue, upon the same basis as is set out in finding 13, assessed against plaintiff an additional excise tax of $427.44 on sales of jewelry from February 1 to June 20, 1936, inclusive. This additional tax, together with interest of $10.82, was paid by plaintiff to the Collector of Internal Revenue under protest on December 2, 1936.
16. Claims for refund demanding the refund in full of the three aforementioned payments of additional taxes and interest were duly filed by plaintiff with the Collector of Internal Revenue for the Third District of New York, and were rejected in their entirety by the Commissioner of Internal Revenue. As to the payment of $25,819.61 on November 23, 1935, the claim was filed on March 13, 1936, and was rejected on December 4, 1936. As to the payment of $4,149.59 on July 15, 1936, the claim was filed on December 15, 1936, and was rejected on January 31, 1938. As to the payment of $438.26 on December 2, 1936, the claim was filed on December 29, 1936, and was rejected on January 24, 1938.
17. The ground upon which all three of the aforesaid claims was based was that the sales to the retail trade by plaintiff of the merchandise which had been manufactured by 594 Fifth Avenue Corporation were not taxable under section 605 of the Revenue Act of 1932, for the reason that plaintiff had acquired said merchandise by purchase from the manufacturer prior to the effective date of section 605, and therefore the later sales by plaintiff of that merchandise could not be subjected to the tax.
The question presented is whether retail sales by plaintiff subsequent to June 20, 1932, of articles of jewelry acquired by it on that date from a predecessor corporation should, for tax purposes, be regarded as sales by the manufacturer and taxable under the provisions of sections 605 and 609 of Title IV of the Revenue Acts of 1932 and 1934, respectively, 26 U.S.C.A. Int.Rev. Acts, pages 609, 786. If it should be held that plaintiff is entitled to recover the excise tax collected, the further question is presented whether upon the facts disclosed by the record it is entitled to refund thereof under the provisions of section 621(d) of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev. Acts, page 621, which provides that no overpayment shall be refunded unless it is established that the tax was not included in the price of the article with respect to which it was imposed, or that the amount of such tax was collected from the vendee.
Section 605 of the Revenue Act of 1932, which became effective June 21 of that year, imposed a tax upon certain articles of jewelry sold by the manufacturer, producer, or importer equivalent to 10% of the price at which sold. Prior to June 20, 1932, Black, Starr Frost-Gorham, Inc., had been a manufacturer and retailer of jewelry and related articles. The tax imposed by statute would attach to all jewelry sold by the corporation on June 21 and thereafter which had been manufactured, produced, or imported by it. With the view of escaping payment of the tax, the existing corporation decided to form a new corporation having the same functions and powers as the old to which the merchandise inventory of the old corporation would be transferred. It was thought that by this method all sales made by the new corporation, the plaintiff herein, of jewelry obtained from the old corporation would not be taxable for the reason that the sales would not then be made by the manufacturer, producer, or importer of the articles sold.
Plaintiff was incorporated and organized on June 20, 1932, with the same name as the old corporation, by reason of the goodwill attaching thereto, and on the same day the name of the old corporation was changed to "594 Fifth Avenue Corporation." Simultaneously with the creation of the new corporation and the change of the name of the old corporation, the merchandise inventory of the old corporation was transferred to the new corporation. The old corporation owned all the stock of plaintiff until its dissolution October 18, 1932, at which time the stock of plaintiff became the property of The Gorham Store, Inc., which had owned all the stock of the old corporation. Plaintiff carried on the business at the same place with the same officers and the same employees, generally, as the old corporation. The only change made was the opening of a new set of books in which to record its business transactions. In these circumstances, we are of opinion that while plaintiff was and is a separate legal entity from the old corporation of Black, Starr Frost-Gorham, Inc., and 594 Fifth Avenue Corporation, it was for tax purposes, as well as all practical purposes and matters of substance, the same corporation. Whatever change took place was only a change in form, rather than in substance. The facts show that the welfare of the business by the avoidance of the excise tax was the motivating cause for the organization of plaintiff corporation, and it is well established that transactions of this kind must be scrutinized with great care to ascertain whether, in substance, they are actually what they purport to be in form.
In Higgins v. Smith, 308 U.S. 473, 60 S.Ct. 355, 357, 84 L.Ed. 406, the Supreme Court said: "In the Commonwealth Improvement Company case [Burnet v. Commonwealth Improvement Co., 287 U.S. 415, 53 S.Ct. 198, 77 L.Ed. 399], the taxpayer, for reasons satisfactory to itself voluntarily had chosen to employ the corporation in its operations. 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 tax disadvantages.
"On the 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 Government may look at actualities and upon determination that the form employed for doing business 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 purposes of the tax statute. To hold otherwise would permit the schemes of taxpayers to supersede legislation in the determination of the time and manner of taxation. It is command of income and its benefits which marks the real owner of property."
Aside from being relieved of the burden of paying the excise tax, the creation of plaintiff corporation had no other legitimate business purpose. Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355. The rule announced in Higgins v. Smith, supra, was applied in Mehrlust v. Higgins, 2 Cir., 112 F.2d 717, in a case very similar, on its facts, to the case at bar. In that case the plaintiff (an individual) was confronted with the possible effects of section 605 of the Revenue Act of 1932 and organized a corporation. The court disregarded the corporation as a separate entity and sustained the collection of the excise tax from Mehrlust, the creator and sole stockholder of the corporation. Upon the facts in this case, we think the rule is applicable here and we are of opinion that while the plaintiff and its predecessor were separate legal entities, they were in fact, for all practical purposes, merged, and the tax was properly assessed and collected on the prices at which sales were made to the public of taxable articles which had been manufactured by Black, Starr Frost-Gorham, Inc., the predecessor corporation.
In any event judgment could not be entered for the reason that the record does not disclose the fact that the amount of the tax was not passed on in the price at which the taxable articles were sold to the public. The petition must be dismissed. It is so ordered.