*94 Decision will be entered under Rule 50.
There having existed a reasonable requirement of petitioner's business for the accumulation of its surplus, held, on the facts, petitioner was not formed or availed of during the taxable years for the purpose of avoiding surtax on its shareholder within the meaning of section 102, I. R. C. 1939.
*1164 *95 Respondent determined deficiencies in petitioner's income tax of $ 56,832.93 and $ 58,577.12 for the calendar years 1947 and 1948, respectively. The only issue is whether petitioner is subject to tax under section 102 as having been availed of during the taxable years to prevent the imposition of surtax upon its sole stockholder by permitting earnings and profits to accumulate beyond the reasonable needs of its business instead of being divided or distributed. Petitioner concedes other adjustments set forth in the deficiency notice.
FINDINGS OF FACT.
Certain facts are stipulated and are hereby found.
Petitioner, a corporation organized in 1931 under the laws of the State of New York, maintained its principal office in Queens Village, New York. Petitioner kept its books of account on the accrual method and on a calendar year basis.
Petitioner filed its returns for 1947 and 1948 with the collector of internal revenue for the first district of New York. On September 7, 1955, respondent sent a registered mail notification to petitioner, pursuant to section 534, I. R. C. 1954, that the notice of deficiency forming the basis of this proceeding set forth an amount with respect to section*96 102 of the Internal Revenue Code of 1939.
At all material times Victor Breitfeller, hereafter called Breitfeller, held all of petitioner's outstanding stock. At all material times petitioner's board of directors consisted of Breitfeller, president and treasurer; Josephine Breitfeller (his wife), vice president; and Fred Heller, secretary.
The deficiency in income tax attributable to Breitfeller in 1947 and attributable to Breitfeller and his wife in 1948 (joint return) would have been $ 135,967.55 and $ 114,671.08, respectively, if petitioner had distributed surplus earnings for the respective years.
*1165 Petitioner sold Pontiac automobiles at retail under a General Motors franchise for an area with a population of 75,000 to 100,000. Breitfeller completely controlled petitioner's operations.
The following schedule shows petitioner's accumulated earnings and profits together with the value of securities held and dividends declared:
| Year | Net profit | Dividends | Dec. 31 | Securities |
| after taxes | paid | surplus | ||
| 1931 | $ 76.64 | $ 76.64 | ||
| 1932 | 63.60 | 2,514.98 | $ 6,399.17 | |
| 1933 | 13,288.73 | 13,339.62 | 6,399.17 | |
| 1934 | 1,603.21 | 4,317.83 | 6,399.17 | |
| 1935 | 9,890.26 | 13,945.16 | 6,399.17 | |
| 1936 | 696.15 | 6,405.10 | 6,399.17 | |
| 1937 | 5,877.17 | 12,540.16 | ||
| 1938 | 2,344.18 | 14,914.17 | ||
| 1939 | 13,890.40 | 29,715.78 | ||
| 1940 | 8,593.80 | 38,309.61 | ||
| 1941 | 44,684.12 | 52,751.95 | ||
| 1942 | 9,531.21 | 56,367.62 | ||
| 1943 | 23,322.15 | 66,296.58 | ||
| 1944 | 33,202.43 | 90,695.81 | ||
| 1945 | 12,368.80 | 89,262.91 | 25,037.50 | |
| 1946 | 108,394.81 | 198,648.71 | 76,238.29 | |
| 1947 | 173,178.51 | 355,642.37 | 76,238.29 | |
| 1948 | 176,093.96 | 1 $ 41,293.08 | 486,915.74 | 277,769.54 |
| 1949 | 158,376.83 | 25,000.00 | 616,559.01 | 377,769.54 |
| 1950 | 177,881.09 | 60,000.00 | 731,086.86 | 382,214.78 |
| 1951 | 100,821.81 | 30,000.00 | 799,840.61 | 580,461.99 |
| 1952 | 67,322.52 | 30,000.00 | 839,185.87 | 581,443.48 |
| 1953 | 61,552.29 | 30,000.00 | 867,781.96 | 581,227.06 |
| 1954 | 7,845.54 | 10,000.00 | 859,767.62 | 581,560.64 |
| 1955 | 4,792.77 | 2,500.00 | 860,717.61 | 479,060.88 |
Petitioner had "working capital agreements" in 1947 and 1948 with General Motors which called for the retention of $ 162,862 of working capital for each year. General Motors never enforced the "working capital agreements" nor did petitioner expect any enforcement. Petitioner sold 484 new automobiles in 1947 and 461 in 1948, but petitioner had hoped to purchase at least 500 automobiles from General Motors for sale in each year. The parties to the "working capital agreements" entered into them anew each year to take account of current economic conditions.
The following schedule shows current assets, current liabilities, the excess of such assets over such liabilities, and the excess of the net current assets so determined over the requirements for working capital under the agreements with General Motors: *1166
| Dec. 31, 1947 | Dec. 31, 1948 | ||
| Current assets: | |||
| Cash | $ 305,906 | $ 203,567 | |
| Receivables | 1 50,613 | 1 61,486 | |
| Inventories | 46,391 | 73,719 | |
| Prepaid expenses and deferred charges | 28,261 | 37,921 | |
| Securities | 76,238 | 277,770 | |
| Total current assets | 507,409 | 654,463 | |
| Current liabilities: | |||
| Payables | 2 77,065 | 2 63,592 | |
| Income tax payable | 106,142 | 107,929 | |
| Total current liabilities | 183,207 | 171,521 | |
| Current assets less current liabilities | 324,202 | 482,942 | |
| General Motors requirements | 162,862 | 162,862 | |
| Excess of net current assets over General | |||
| Motors requirements | 161,340 | 320,080 |
In 1947 and 1948, the seller's market allowed a dealer to sell a new car in time to pay for its purchase. Dealers did not find it necessary to accept trade-ins, or if accepted, trade-ins could be disposed of immediately.
During 1947, petitioner expended $ 2,579 and in 1948, $ 34,366 in acquiring additional facilities. Petitioner had other more indefinite plans for acquiring further facilities which had not materialized during 1947 and 1948.
Since before 1941, petitioner considered in an indefinite way the desirability of financing its own sales, but those plans have not materialized. Out of 120 General Motors dealers in the New York and Boston areas, only one dealer of a size incomparable to petitioner combined the finance business with the automobile retail business.
Petitioner voluntarily relinquished the St. Albans, New York, area from its franchise in 1934. Since then the area with a population*99 of 75,000 to 100,000 remained unfranchised or "open." Petitioner never requested a General Motors franchise covering the St. Albans area if and when such franchise was issued. General Motors franchise agreements, being nonexclusive, allow a dealer to solicit business anywhere in the country. Acquisition of a St. Albans franchise by petitioner would require expenditures of $ 200,000 to $ 250,000. Acquisition of a St. Albans franchise by another dealer would be detrimental to petitioner.
Breitfeller held all of the stock of Breitfeller Motors, Inc., an automobile agency distinct from petitioner. In 1947 and 1948 he knew the effect of section 102 of the Internal Revenue Code of 1939. He borrowed money from petitioner throughout its existence including the years 1947 and 1948. He paid no interest during those years.
*1167 In 1947 and 1948 petitioner invested in securities unrelated to its business.
An examination of petitioner's 1947 and 1948 income tax returns was begun with the knowledge of petitioner's officers prior to March 15, 1951. Petitioner's minute book includes minutes of no annual meetings of the directors prior to January 2, 1948. Only minutes beginning in 1948*100 have been reduced to writing since petitioner's incorporation. The internal revenue agent did not see the minute book during his investigation to determine the imposition of section 102 surtax.
Petitioner's minutes show that its directors, early in 1948, reviewed and approved plans and policies for expanding facilities, making provision for protection of petitioner's "interest" in the St. Albans area, and the possible financing of installment sales of automobiles. They concluded that the accumulated surplus was needed by petitioner in its business. The minutes further show that late in 1948, the directors met, reviewed, and reapproved the same aspects of petitioner's plans.
Petitioner was not availed of during 1947 and 1948 for the purpose of preventing surtax on its sole stockholder by permitting its earnings and profits to accumulate beyond the reasonable needs of its business instead of being distributed.
OPINION.
It is true that up to the end of 1948, the latest year before us, not a single dollar of taxable dividends had ever been declared by petitioner, although as of the end of that period a surplus of almost half a million dollars had been accumulated of which over half*101 was in marketable securities unrelated to petitioner's business. It is likewise true that during this time loans were made by petitioner to its sole stockholder. This is some indication that under section 1021 the purpose of the absence of dividends was to furnish funds to the stockholder while at the same time avoiding the imposition upon him of the high surtaxes which the record shows would have been due had petitioner's earnings been distributed to him as dividends. Helvering v. Nat. Grocery Co., 304 U.S. 282">304 U.S. 282; Helvering v. Stock Yards Co., 318 U.S. 693">318 U.S. 693.
*102 *1168 But we have made the finding which we think the record compels, that a reasonable requirement of the business then existed for these accumulations. The working capital needed to fulfill petitioner's agreement with General Motors coupled with the expenses of physical expansion and the continuing possibility that it might be required to finance a new dealership in the adjoining St. Albans territory 2 are alone sufficient to account for all of the contemporary surplus. 3 Petitioner's directors having currently faced the problem, cf. Smoot Sand & Gravel Corp. v. Commissioner, (C. A. 4) 241 F. 2d 197, reversing T. C. Memo. 1956-82, certiorari denied 354 U.S. 922">354 U.S. 922, 4 and having, as we have found, made the required analysis of petitioner's position, and the consequent decision that its existing resources could not safely be dispensed with, we are not in a position to assume, as would be necessary, that their true judgment was otherwise, or that the ostensible purpose of the failure to distribute dividends was different from its real motivation. Dill Manufacturing Co., 39 B. T. A. 1023, 1031;*103 J. L. Goodman Furniture Co., 11 T.C. 530">11 T. C. 530. On the situation as it existed during the tax period in controversy, we conclude that respondent's action was unjustified.
*104 We arrive at this result on the record as a whole and, although the matter is the subject of controversy between the parties, without the necessity of determining under section 534, I. R. C. 1954, where the burden of proving 5 business necessity lies. Cf. Pelton Steel Casting *1169 Co., 28 T. C. 153, on appeal C. A. 7. While some possibility always remains that the presumption of the determination's correctness survives even proof of reasonable needs, see Pelton Steel Casting Co., supra, this proceeding was litigated on the apparently mutual assumption that decision of this total issue would dispose of the matter. See Smoot Sand & Gravel Corp. v. Commissioner, supra.
*105 It goes without saying that subsequent developments in later years might lead to altogether different conclusions. We are required to express no opinion as to such issues. Suffice it to say that nothing shown here as to petitioner's conduct after 1948 throws doubt on the conclusion we have reached as to its purpose during the period under review.
To adjust for conceded issues,
Decision will be entered under Rule 50.
Footnotes
1. Nontaxable stock dividend.↩
1. Amounts per stipulated schedule; balance sheets on income tax returns show totals of $ 52,454 and $ 45,530, respectively.↩
2. Includes accounts payable, accrued expenses, and deposits. Balance sheets on income tax returns show totals of $ 77,303 and $ 64,335, respectively.↩
1. SEC. 102. SURTAX ON CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS.
(a) Imposition of Tax. -- There shall be levied, collected, and paid for each taxable year (in addition to other taxes imposed by this chapter) upon the net income of every corporation (other than a personal holding company as defined in section 501 or a foreign personal holding company as defined in Supplement P) if such corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders or the shareholders of any other corporation, through the medium of permitting earnings or profits to accumulate instead of being divided or distributed, a surtax * * *↩
2. Although respondent challenges the need for the St. Albans dealership, he nowhere questions petitioner's estimated figures, assuming the franchise were acquired.↩
3. The increase in surplus during the 2 instant years was $ 288,267. Attributing $ 250,000 to the prospective franchise acquisition, $ 36,945 to actual expenses of contemplated additional facilities, and $ 1,885 to deficiencies in working capital under the General Motors agreements, it will be seen that $ 288,830, or slightly more than the growth in surplus, was required.↩
4. "* * * In order to determine whether profits were accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time of the accumulation, not subsequently declared intentions which are merely the products of afterthought. K. O. M. A. Inc., v. Commissioner, * * * [(C. A. 10) 189 F. 2d 390]; Bride v. Commissioner, * * * [(C. A. 8) 224 F.2d 39">224 F. 2d 39, certiorari denied 350 U.S. 883">350 U.S. 883↩]."
5. SEC. 534. BURDEN OF PROOF.
(a) General Rule. -- In any proceeding before the Tax Court involving a notice of deficiency based in whole or in part on the allegation that all or any part of the earnings and profits have been permitted to accumulate beyond the reasonable needs of the business, the burden of proof with respect to such allegation shall --
* * * *
(2) If the taxpayer has submitted the statement described in subsection (c), be on the Secretary or his delegate with respect to the grounds set forth in such statement in accordance with the provisions of such subsection.
* * * *
(c) Statement by Taxpayer. -- Within such time (but not less than 30 days) after the mailing of the notification described in subsection (b) as the Secretary or his delegate may prescribe by regulations, the taxpayer may submit a statement of the grounds (together with facts sufficient to show the basis thereof) on which the taxpayer relies to establish that all or any prt of the earnings and profits have not been permitted to accumulate beyond the reasonable needs of the business.↩