1940 BTA LEXIS 881">*881 Petitioner was organized in 1924 as a common law trust, and is an association taxable as a corporation. Its business is primarily that of a holding company. Members of the Olin family are the owners and holders of its units of beneficial interest. Prior to the taxable years 1932 and 1933 it had large earnings and profits only part of which it had distributed as dividends to the holders of its beneficial interest. During prior years it had accumulated a large earned surplus. In 1932 it declared a dividend of $100,000, and in 1933 it declared no dividend but declared a dividend of $150,000 early in 1934. Held, that in the taxable years petitioner permitted its earnings and profits to accumulate beyond the reasonable needs of its business and that during these two taxable years petitioner was availed of for the purpose of preventing the imposition of the surtax upon the owners of its units of beneficial interest through the medium of permitting its gains and profits to accumulate instead of being divided or distributed. Sec. 104, Revenue Act of 1932.
42 B.T.A. 1203">*1203 Deficiencies in income tax were determined by the respondent against petitioner for the calendar years 1932 and 1933 in the amounts of $128,734.58 and $100,481.83, respectively. The Commissioner in his notice of deficiency stated, among other things, as follows:
After careful consideration of your Federal income tax returns and all other available information, the Bureau holds that your trust is subject to taxation under the provisions of section 104 of the Revenue Act of 1932.
Three errors were assigned, one of which petitioner has waived and one of which the respondent has conceded, thus leaving for our determination only one issue, namely, whether petitioner was either formed or availed of for the purpose of preventing the imposition of the surtax upon the owners of its units of beneficial interest through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, and thus was made subject to the tax imposed by section 104 of the Revenue Act of 1932.
FINDINGS OF FACT.
Petitioner is a common law trust, taxable as a corporation, with its office and place of business1940 BTA LEXIS 881">*883 in East Alton, Illinois. It was organized at the instigation of F. W. Olin under a declaration of trust dated March 1, 1924, at which time Spencer T. Olin (son of F. W. Olin) transferred to it six shares of common stock of the Western Cartridge Co. (hereinafter sometimes referred to as Cartridge) of 42 B.T.A. 1203">*1204 the par value of $100 per share and three Village of East Alton bonds of the face value of $200 each. At the same time, 10 units of beneficial interest in the trust were issued to Mary M. Olin (wife of F. W. Olin). On March 8, 1924, an amended trust agreement was entered into, at which time F. W. Olin transferred to it, in exchange for 90 units of beneficial interest, 14,718 shares of common stock of Cartridge and 2,475 shares of common stock of the Equitable Powder Manufacturing Co. (hereinafter sometimes referred to as Equitable) of the par value of $100 per share. The stock of Cartridge was entered on petitioner's books at a value of $95 per share, the Village of East Alton bonds at face value, and the stock fo Equitable at par, thus making a total value for all securities turned in of $1,646,880. On March 10, 1924, F. W. Olin gave to each of his two sons, John M. and1940 BTA LEXIS 881">*884 Spencer T. Olin, 10 units of beneficial interest, which left F. W. Olin owning 70 units and his wife 10 units, or a total of 100 units outstanding. The trustees of petitioner at the time it was organized were F. W. Olin, John M. Olin, and Charles A. Caldwell, the president of one of the Alton banks.
The objects and purposes of the common law trust thus organized were stated in the amended trust agreement dated March 8, 1924, to be as follows:
6. SECOND: In trust pending final conversion and distribution of the property, to hold, control, manage, use, employ, invest and re-invest, the same, having full power and authority:
7. (a) To pay and discharge as such Trustees, but not personally, any debts and obligations against said property so conveyed, transferred or assigned, to defend all suits now pending or that may be hereafter instituted in reference to or against said property; and as trustees, to satisfy all judgments that may have been or may hereafter be entered or rendered against said property or the owners thereof because of said property.
8. (b) To buy, hold, sell, convey, lease, sublease, encumber, exchange and rent real estate and do a general real estate business.
1940 BTA LEXIS 881">*885 9. (c) To take and give such security as may be found desirable.
10. (d) To buy, hold, and sell stocks, bonds, debentures and any security executed by any corporation, firm, association or individual; and while the owner of any stocks to vote thereon in person or by proxy; to collect, receive and receipt for the dividends thereon and to contract with each or any of the companies in which they may hold stock as said trustees in respect to any matter or matters relating to the conduct of the business of any such company or companies.
11. (e) To issue bonds, execute mortgages, notes, debentures and other securities and sell the same in any manner desired by the trustees herein; to buy and sell, exchange and discount notes.
12. (f) To buy, build or otherwise acquire lands, buildings, machinery and equipment for the purpose of, and to be used in connection with the conduct, operation and maintenance of any business permitted by this Trust Agreement.
13. (g) To invest any money that may come into their hands, in such manner and in such property or securities, real or personal and wherever situated, as may seem to be advantageous, prudent and expedient.
42 B.T.A. 1203">*1205 14. 1940 BTA LEXIS 881">*886 (h) To begin and defend legal proceedings and compromise, settle or arbitrate claims, and in connection therewith to employ attorneys and counsel or other advisers.
15. (i) To deal generally in goods, wares and merchandise of every kind, class and description upon such terms and in such places as they may deem advisable.
16. (j) To form a corporation or corporations under the laws of any State or States in the United States for the purpose of receiving or acquiring any or all of the property, whether real, personal or mixed, of the Trust Estate at any time or times held or owned by them; and to convey to such corporation or corporations any or all of the property or properties at any time or times owned and held by said Trust Estate herein.
17. (k) Generally, to do all acts and things which, in their judgment, are necessary, proper and advantageous or expedient to promote the complete and most successful execution of this Trust and the interests of the cestuis que trustent thereunder; having for all the aforesaid purposes and for the purpose of sale, conveyance, lease, mortgage, exchange, investment and re-investment, improvement and development, and any and all arrangements, 1940 BTA LEXIS 881">*887 contracts and disposition of the trust property or any part thereof, all and as full discretionary powers and authority as if they were themselves the sole and absolute owners thereof in fee simple. The naming of any specific duty and power herein shall not be construed as limiting the general powers of such trustees.
(1) To accept, receive and acquire by gift, purchase, bequest, devise or otherwise any and all other property which at any time and from time to time may be given, sold, conveyed, assigned, transferred, delivered, bequeathed or devised to them by any person or persons, and hold, manage, control, with all the rights, authorities and powers of ownership of such additional property as they possess with respect to the property already conveyed to them.
18. THIRD: In trust to collect and receive all rents, income and profits from the property and from the conduct of the business and affairs of the trust, and at their convenience and in their discretion to distribute such portion thereof as they may determine to be fairly distributable among the several cestuis que trustent according to their respective interests as evidenced by the certificate or certificates of beneficial1940 BTA LEXIS 881">*888 interests at such time or times owned and held by the said cestuis que trustent; provided, that in such distribution, every unit shall share equally with every other unit. The Trustees in this connection having full authority, from time to time, to use any funds on hand, whether received as "corpus" or "income" for the purpose of any repair, improvement, protection or development, of the property held hereunder, or the acquisition of other property as may be determined to be wise and expedient for the protection or development of the said trust estate property as a whole, and the business and conduct of the affairs of the trust, pending its final conversion and distribution. The determination of the Trustees made in good faith as between "corpus" and "income" shall be final.
* * *
The shares of Cartridge transferred to petitioner constituted 51.84 percent of the outstanding stock of that corporation. On March 1, 1924, and continuously thereafter, Cartridge owned all the stock of the East Alton Public Service Co. The above shares of Equitable transferred to petitioner constituted 49.6 percent of the outstanding stock of that corporation. On March 1, 1924, and continuously1940 BTA LEXIS 881">*889 thereafter, Equitable owned all the stock of the Texas Powder Co. 42 B.T.A. 1203">*1206 and 74.25 percent (increased to 74.75 percent on July 15, 1930) of the stock of Egyptian Powder Co. F. W. Olin was president and a director and John M. Olin was vice president and a director in all of these corporations except the Texas Powder Co. Spencer T. Olin was also an officer and a director in several of the corporations heretofore named.
The holdings of F. W. Olin on March 1, 1924, prior to any transfer to petitioner, were as to follows:
| Property | Shares | |
| Western Cartridge Co., common | (53.58%) | 15,221 |
| Equitable Powder Manufacturing Co | (50.80%) | 2,545 |
| Western Powder Manufacturing Co | (100%) | 1,000 |
| Egyptian Powder Co | 10 | |
| Alton National Bank | 15 | |
| East Alton Loan & Investment Assn. (full paid) | 25 | |
| Bonds (26 different kinds) | (par value) | $504,390.00 |
| Loans to individuals (14) | 96,766.47 | |
| Real estate | 48,868.79 |
At the time petitioner was created both John M. and Spencer T. Olin and their mother, Mary M. Olin, owned certain assets to an extent not shown by the record, which assets were not transferred to petitioner. Among the assets owned by John were1940 BTA LEXIS 881">*890 about 1,400 or 1,500 shares of Cartridge.
At some time during March 1924 F. W. Olin gave to each of his two sons, John M. and Spencer T. Olin, 400 shares, and to his wife, Mary M. Olin, 100 shares, of the capital stock of the Western Powder Manufacturing Co. thereby retaining 100 shares for himself.
The assets and liabilities of petitioner at the end of 1931, 1932, and 1933, exclusive of a dividend on the common stock of Cartridge which was received by petitioner in preferred stock of Cartridge in 1926 but was not entered on petitioner's books until 1936, were as follows:
| 1931 | 1932 | 1933 | |
| ASSETS: | |||
| Cash | $43,996.84 | $158,313.06 | $42,567.61 |
| Notes receivable | 2,133,915.42 | 1,245,266.71 | 1,409,533.92 |
| Securities | 3,128,019.57 | 3,277,211.21 | 3,394,560.71 |
| Investments - State obligations | 545,942.71 | 489,245.50 | 462,256.13 |
| Accrued interest | 23,410.66 | 40,413.47 | 59,393.48 |
| Accrued income | 66.11 | 66.11 | 129.86 |
| Accrued dividends | 12.50 | ||
| Accounts receivable | 1,333.10 | 1,663.50 | |
| Total | 5,875,351.31 | 5,211,849.16 | 5,370,117.71 |
| LIABILITIES AND CAPITAL: | |||
| Accounts payable | 770,831.74 | 876,648.33 | 883,255.75 |
| Notes payable | 1,130,700.00 | 196,768.92 | 140,700.00 |
| Original corpus | 1,646,880.00 | 1,646,880.00 | 1,646,880.00 |
| Earned surplus | 2,326,939.57 | 2,491,551.91 | 2,699,281.96 |
| Total | 5,875,351.31 | 5,211,849.16 | 5,370,117.71 |
1940 BTA LEXIS 881">*891 42 B.T.A. 1203">*1207 During 1931 petitioner acquired all the capital stock of the Liberty Powder Co. and during that year and the following year it loaned to that company a total of $40,000 in order that it might carry on its business during a period when it was losing money. It also deposited with the Pennsylvania Bureau of Workmen's Compensation a part of its securities in order that the Liberty Powder Co. might carry its own workmen's compensation insurance.
In December 1931 petitioner borrowed $1,000,000 and loaned it to Cartridge to be used by that company in acquiring the assets of the Winchester Repeating Arms Co., as hereinafter more fully set forth. This loan was repaid in April 1932. In 1933 petitioner loaned Cartridge $100,000 to be used as working capital. In 1932 and 1933 petitioner purchased preferred stock of Cartridge in the amounts of $166,224.14 and $119,281.50, respectively. This stock was issued by Cartridge in connection with the acquisition of the assets of the Winchester Repeating Arms Co., as hereinafter more fully set forth. Prior to this acquisition there had been about 100 preferred stockholders and the additional issue increased the number to about 5,500, 1940 BTA LEXIS 881">*892 some of them holding only one share. There were about 2,300 stockholders holding only a few shares each. The stock was listed on the New York Curb Exchange against the wishes of the management. Petitioner purchased the stock in order to reduce the number of shareholders, because since the stock was a 6 percent cumulative stock it felt some of the small stockholders might embarrass Cartridge in bad years.
In order to keep petitioner's resources available for the needs of its business, it was the practice to credit dividends declared to the accounts of the holders of units of beneficial interest. In some cases interest bearing notes would be given for the amount of the dividends. In this way the money was available for use by petitioner if an emergency need for funds should arise. The items of accounts payable and notes payable appearing in the balance sheets set out above included liabilities of petitioner to holders of beneficial interest as follows:
| 1931 | 1932 | 1933 | |
| F. W. Olin | $511,200.00 | $636,200.00 | $636,200.00 |
| Mary M. Olin | 116,331.74 | $132,148.33 | 138,755.75 |
| John M. Olin | 82,000.00 | 92,000.00 | 92,000.00 |
| Spencer T. Olin | 82,000.00 | 92,000.00 | 92,000.00 |
| Total | 791,531.74 | 952,348.33 | 958,955.75 |
1940 BTA LEXIS 881">*893 It was petitioner's practice to lend money to three of its holders of beneficial interests. Such loans were bona fide loans and interest was paid on all of them by the borrowers and such loans were repaid from 42 B.T.A. 1203">*1208 time to time. The item of notes receivable appearing in the balance sheets hereinbefore set out included amounts owing petitioner by holders of beneficial interest as of December 31, 1931, 1932, and 1933, as follows:
| 1931 | 1932 | 1933 | |
| F. W. Olin | $428,208.75 | $425,094.19 | $418,323.90 |
| John M. Olin | 234,955.28 | 260,551.51 | 268,979.09 |
| Spencer T. Olin | 68,591.94 | 92,601.61 | 154,752.42 |
| Total | 731,755.97 | 778,247.31 | 842,055.41 |
At the end of every year from 1924 to 1937, except 1925 (when the net balance was $26,500), petitioner was indebted in the aggregate to the holders of units of beneficial interest in an amount in excess of their aggregate indebtedness to petitioner.
The item "Securities" appearing in the balance sheets hereinbefore set out represented cost to petitioner and was made up of the following:
| 1931 | 1932 | 1933 | |
| Stocks of affiliated companies: | |||
| 2,480 shares Equitable | $248,000.00 | $248,000.00 | $248,000.00 |
| 32,100 shares Liberty Powder Co | 310,966.74 | 312,006.74 | 312,006.74 |
| 14,724 shares Cartridge - common | 1,398,780.00 | 1,398,780.00 | 1,398,780.00 |
| 3,276 shares Cartridge - preferred | |||
| (acquired in 1932) | 166,224.14 | 166,224.14 | |
| 2,013 shares Cartridge - preferred | |||
| (acquired in 1933) | 119,281.50 | ||
| Total | 1,957,746.74 | 2,125,010.88 | 2,244,292.38 |
| Savage Arms Co | 356,102.50 | 359,602.50 | 359,602.50 |
| Other corporate stocks | 313,837.50 | 295,235.00 | 295,283.00 |
| Bonds other than state | 500,332.83 | 497,362.83 | 495,382.83 |
| Total | 3,128,019.57 | 3,277,211.21 | 3,394,560.71 |
1940 BTA LEXIS 881">*894 The market values on December 31 of the last three items appearing in the immediately preceding schedule, together with the total shrinkage in value and the total cost thereof, were as follows:
| 1931 | 1932 | 1933 | |
| Savage Arms Co | $114,126.25 | $69,112.50 | $167,325.00 |
| Other corporate stocks | 159,981.25 | 141,500.00 | 172,194.50 |
| Bonds other than state | 279,277.50 | 276,167.50 | 179,663.75 |
| Total market value | 553,385.00 | 486,780.00 | 519,183.25 |
| Total shrinkage | 616,887.83 | 665,420.33 | 631,085.08 |
| Total cost | 1,170,272.83 | 1,152,200.33 | 1,150,268.33 |
The marketable securities, including municipal or state obligations, owned by petitioner were purchased so that there would be some income from the capital, with the thought that the securities could be converted into cash or be used as collateral for credit when the money was needed.
42 B.T.A. 1203">*1209 Expansion in the arms field. - F. W. Olin first became interested in going into the arms business soon after the World War. Both of the active competitors of Cartridge, namely, the Union Metallic Cartridge Co. (now known as the Remington Arms Co.) and the Winchester Repeating Arms Co. manufactured arms. It was the1940 BTA LEXIS 881">*895 custom of these competitors to use the sale of arms to control the sale of ammunition and in many cases they refused to sell their arms to jobbers unless the latter agreed to buy their brand of ammuntion. This practice interfered with Cartridge's business with such jobbers. This sort of competition become more spirited after the war. Because of this competition Olin began looking for an arms business to protect the business of Cartridge. He investigated different manufacturers. In 1922 or 1923, he paid $5,000 for the privilege of investigating the inventory and equipment of the Marlin Arms Co. of New Haven, Connecticut. He also investigated the Hoffman Arms Co., visiting its plant at Ardmore, Oklahoma in 1923.
At the time of these investigations, Olin did not feel that he was yet in a position to go into the arms business on the scale on which he desired to enter it. While the necessity for gun-making facilities as an adjunct to the Cartridge business was foremost in his mind, neithr he nor any of the companies he controlled was in a financial position to purchase any substantial arms business, and he anticipated that it would be necessary to accumulate funds for this purpose.
1940 BTA LEXIS 881">*896 Neither petitioner nor any of the Olins had had any experience in the actual manufacture of arms. In the latter part of 1929 they had ten guns made by one Swebilius. This experiment demonstrated the necessity for acquiring an established business instead of, as had been the intention, building a gun factory at East Alton to be associated with the operations of Cartridge. The experiment did not, however, change Olin's views as to the necessity for going into the gun business as an adjunct to the ammunition business. F. W. Olin went to Ithaca, New York, and unsuccessfully attempted to purchase the Ithaca Gun Co. In 1925 petitioner negotiated unsuccessfully for the purchase of the Remington Arms Co. Petitioner later purchased 29,000 shares of the common stock of the Savage Arms Co. as a part of the plans for expanding in the arms field.
Early in 1926 the Olins felt they had a good chance of purchasing the assets of the Winchester Repeating Arms Co., which had been placed in the hands of a receiver in 1921. Negotiations continued until 1931, at which time the price was fixed at $3,300,000 in cash and $4,800,000 in par value of Cartridge's 6 percent preferred stock. Early1940 BTA LEXIS 881">*897 in September 1931 negotiations were opened with the First National Bank of St. Louis for credit. After various plans had been formed and abandoned, it was finally arranged that the First National 42 B.T.A. 1203">*1210 Bank and the Boatmen's National Bank, both of St. Louis, and the Guaranty Trust Co. of New York would supply $3,100,000 of the needed cash. On October 16, 1931, Cartridge's formal offer to purchase the assets of Winchester was accepted, and on December 19, 1931, loans were made as follows:
| Lender | Borrower | Amount |
| First National | Cartridge | $800,000 |
| Boatmen's National | do | 300,000 |
| Guaranty Trust | do | 500,000 |
| First National | Petitioner | 837,500 |
| Boatmen's National | do | 162,500 |
| First National | F. W. Olin | 337,500 |
| Boatmen's National | do | 162,500 |
| 3,100,000 |
Petitioner in turn loaned to Cartridge the $1,000,000 it had borrowed from the two St. Louis banks, and F. W. Olin did likewise with the $500,000 he had borrowed.
The banks demanded collateral from petitioner and from Olin. To secure the $1,000,000 loaned to petitioner, the latter deposited collateral having a market value of $1,386,035. Included in the collateral pledged was all of the stock1940 BTA LEXIS 881">*898 petitioner owned in Equitable. Petitioner pledged practically all of its assets except the stocks it held in Cartridge. To secure the $500,000 loan to F. W. Olin, he deposited collateral having a market value of $925,130, including the 65 shares of Equitable which he owned individually.
Cartridge used the $3,100,000 thus borrowed and $4,800,000 par value of its 6 percent preferred stock to purchase the assets of the Winchester Repeating Arms Co. on December 22, 1931. A new Winchester Repeating Arms Co. was formed to take over the assets, at which time Cartridge acquired all the stock of the new company. This new company manufactures and sells arms, ammunition, roller skates, cutlery, flashlights, and batteries. It formerly manufactured war munitions and fishing tackle. It has its own brass rolling department, which supplied, until quite recently, the Winchester requirements for brass and metals for ammunition. It is now expanding its cutlery department and expects to expand its brass rolling facilities at a total expenditure of from $750,000 to $800,000 for both facilities.
Expansion in the high explosives field. - At the time petitioner was formed, F. W. Olin had1940 BTA LEXIS 881">*899 in mind accumulating funds for expansion in the manufacture of high explosives. The black powder business was declining and the consumption of high explosives was increasing. The decline in the use of black powder was due primarily to the substitution of permissible powder, a form of high explosive. Permissible powder (so called because its sale as such is permitted only after approval by the Government) came into use in 1909 or 42 B.T.A. 1203">*1211 1910. Permissible powder is safer for use in mining than is black powder and the United States Bureau of Mines encourages its use. Prior to the time petitioner was organized, Olin had unsuccessfully carried on negotiations with the General Explosives Corporation for the purchase of a high explosives plant. At the time petitioner was formed none of the corporations controlled by Olin was engaged in the business of manufacturing high explosives, and Olin had plans for using the Western Powder Manufacturing Co. in the high explosives field. Its mill was suitably located and Olin took an option on he property adjacent to the plant of the Western Powder Manufacturing Co. and had a railroad sidetrack built.
After petitioner was organized it1940 BTA LEXIS 881">*900 loaned the Peerless Explosives Co. $147,000 in 1930, taking a controlling interest in the stock as collateral, with the idea of taking the company over as a high explosives plant and operating it in conjunction with the Black Diamond Powder Co., on which an option had been taken. After making an investigation, petitioner decided not to purchase, as there was no sidetrack to the warehouse and no conveniences for shipping. Petitioner also negotiated unsuccessfully for a high explosives plant with the Puget Sound & Alaska Powder Co., the Aetna Powder Co., the Illinois Powder Co., the Nitro Powder Co., and the Burton Explosives Co. In 1930 and 1931 petitioner loaned $260,000 to the Liberty Explosives Corporation with the idea of acquiring its high explosives plant. Petitioner caused the Liberty Powder Co. to be organized to take over the assets of the Liberty Explosives Corporation when the latter corporation could not pay off its loans.
Also, some time after petitioner was organized, it invested around $650,000 in research work on the purification of wood fibers as a substitute for cotton linters in making smokeless powder being conducted by the Cellulose Research Corporation, 1940 BTA LEXIS 881">*901 which had been organized by Cartridge and Everly M. Davis. These experiments are still in progress. Cartridge now owns all the stock of Cellulose Research Corporation. In 1931 petitioner also loaned $320,000 to the Davis Pulp & Paper Co. This loan was made when it was determined that the Cellulose Research Corporation would need a supply of timber for wood fiber purposes. Petitioner investigated the site of timber properties on Vancouver Island. The property was free from all duties and that gave considerable advantage in marketing pulp and shipping it out of the Dominion of Canada. It was hoped and expected that at Fort McNeal they would be able to extend the development already started there, carrying on some lumber operations, and to extend pulpmaking facilities in that locality. At the same time, 1931, petitioner loaned $50,000 to Land, Inc. Davis owned the controlling interest in this company and invested the $50,000 in the cellulose experiment.
42 B.T.A. 1203">*1212 The net income, dividends paid, other charges to surplus, and accumulated surplus at the end of the year from 1924 to 1933, exclusive of a dividend on the common stock of Cartridge which was received by petitioner1940 BTA LEXIS 881">*902 in preferred stock of Cartridge in 1926 but was not entered on petitioner's books until 1936, were as follows:
| Year | Net income | Dividends | Other charges | Accumulated |
| paid | to surplus | surplus at | ||
| end of year | ||||
| 1924 | $123,473.80 | $120,000 | None | $3,473.80 |
| 1925 | 368,192.59 | None | None | 371,666.39 |
| 1926 | 354,849.44 | 250,000 | $652.42 | 475,863.41 |
| 1927 | 345,421.99 | 200,000 | 3,000.55 | 618,284.85 |
| 1928 | 535,063.18 | 350,000 | 3,636.08 | 799,711.95 |
| 1929 | 669,093.55 | 100,000 | 2,080.66 | 1,366,724.84 |
| 1930 | 597,642.12 | 100,000 | 8,825.42 | 1,855,541.54 |
| 1931 | 475,602.38 | None | 4,204.35 | 2,326,939.57 |
| 1932 | 270,833.01 | 100,000 | 6,220.67 | 2,491,551.91 |
| 1933 | 207,682.05 | None | (Cr.) 48.00 | 2,699,281.96 |
| Total | 3,947,854.11 | 1,220,000 | 28,572.15 |
A dividend of $150,000 was paid by petitioner on January 31, 1934. The income of petitioner was realized from interest and dividends. Petitioner had no separate office and had only one part-time employee, who kept its accounts and was paid a salary of $300 per annum. Petitioner's officers were paid $300 per annum.
The net income of F. W. Olin, taxable and nontaxable, for the years 1929 to 1933, was as follows: 1940 BTA LEXIS 881">*903
| Year | Net taxable income | Nontaxable interest | Total net income |
| 1929 | $59,308.95 | $54,843.52 | $114,152.47 |
| 1930 | 68,923.80 | 60,688.91 | 129,612.71 |
| 1931 | 4,292.60 | 60,628.51 | 64,921.11 |
| 1932 | 65,820.69 | 61,067.79 | 126,888.48 |
| 1933 | 19,868.50 | 42,255.54 | 62,124.04 |
| Total | 218,214.54 | 279,484.27 | 497,698.81 |
The holders of units of beneficial interest of petitioner reported in their individual income tax returns the dividends paid or credited to them by petitioner, but they did not report the undistributed profits of petitioner or pay a tax thereon.
Petitioner was not formed in 1924 for the purpose of preventing the imposition of the surtax upon the owners of its units of beneficial interest.
During the taxable years 1932 and 1933 petitioner was not a mere holding or investment company.
During the years 1932 and 1933 petitioner permitted its gains and profits to accumulate beyond the reasonable needs of the business.
In the taxable years 1932 and 1933 petitioner was availed of for the purpose of preventing the imposition of the surtax upon the owners 42 B.T.A. 1203">*1213 of its units of beneficial interest through the medium of permitting its gains and profits1940 BTA LEXIS 881">*904 to accumulate instead of being divided or distributed.
OPINION.
BLACK: As previously stated, we have only one question left for our determination, and that is whether petitioner was either formed or availed of for the purpose mentioned in section 104 of the Revenue Act of 1932. The material provisions of this section are printed in the margin.1 This question is one of ultimate fact rather than law. Our function is to draw inferences, to weigh the evidence and to declare the result. . The respondent's determination that section 104 applies "is presumed to be correct until the contrary appears from the evidence." .
(a) If any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax 2 upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal1940 BTA LEXIS 881">*905 to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section 13 and shall be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax.
(b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.
Section 104(b) mentions certain facts, which, if any one is present, shall be prima facie evidence of the condemned purpose. The presumption thus arising under subsection (b) is in addition to the presumption of correctness attaching to the respondent's determination. 1940 BTA LEXIS 881">*906 ; certiorari denied, ; . Any of these presumptions that may exist are rebuttable, however, and the respondent can not prevail if there is satisfactory proof that petitioner was neither formed nor availed of for the purpose mentioned in the statute. ; .
At the outset petitioner concedes that it comes within the term "corporation" as defined in section 1111(a)(2) of the Revenue Act of 1932.
Although the respondent did not indicate in his deficiency notice the ground upon which his determination was based other than that petitioner was "subject to taxation under the provisions of section 104", he now contends that the evidence shows (1) that petitioner was 42 B.T.A. 1203">*1214 formed in 1924 and during the taxable years was availed of for the purpose of preventing the imposition of the surtax upon the owners of its units of beneficial interest, (2) that during the taxable years in question petitioner was a mere1940 BTA LEXIS 881">*907 holding or investment company, and (3) that during those years petitioner permitted its gains or profits to accumulate beyond the reasonable needs of the business. We shall now consider these respective contentions in their order.
(1) In our findings of fact we have found that petitioner was not formed in 1924 for the purpose of preventing the imposition of the surtax upon the owners of its units of beneficial interest. Petitioner has introduced much evidence bearing upon this point. We think it is unnecessary to discuss this evidence in detail. We think it is sufficient to say that it convinces us that the purpose motivating the organization of petitioner was not to prevent the imposition of the surtax upon the holders of its units of beneficial interest.
(2) Likewise in our findings of fact we have found that during the taxable years 1932 and 1933 petitioner was not a mere holding or investment company. There is much evidence in the record bearing upon petitioner's business activities, both during the taxable years and prior years. We think that this evidence shows that petitioner was primarily a holding and investment company. 1940 BTA LEXIS 881">*908 Cf. .almours ; . But while we think that the facts show that petitioner was primarily a holding and investment company, we would be unwilling to say that it was a mere holding or investment company, within the meaning of the applicable statute. Cf. .
(3) During the taxable years, did petitioner permit its gains and profits to accumulate beyond the reasonable needs of its business? We think it did and we have so found in our findings of fact.
Petitioner, in support of its contention that its accumulation of profits during the taxable years should be held to have been in the pursuance of the reasonable needs of its business, cites among other cases the following: ; ; ; We think these cases are distinguishable on their facts.
1940 BTA LEXIS 881">*909 We think the facts of the instant case fall more in the ambit of such cases as ; ;;.
In , in discussing our finding that during the taxable years in question the taxpayer corporation permitted its gains and profits to accumulate beyond the reasonable needs of its business, we said, among other things:
42 B.T.A. 1203">*1215 Coming now to the question of whether the petitioner was "availed of" for the interdicted purpose for the years 1931 and 1932, the evidence shows that the petitioner's book income for those years was $2,585,795.57 and $1,563,201.18, respectively, and that the dividends paid were $863,839.15 and $867,660.40, respectively. From the date of its inception to the end of 1932 the corporation accumulated undistributed earnings and profits amounting to more than $18,000,000. The petitioner contends that this accumulation was necessary to carry out the purpose of its organization. We are of the opinion, however, that these is no merit in1940 BTA LEXIS 881">*910 this contention. The petitioner had substantially no liabilities. It was not actively engaged in any business which required this large accumulation of earnings. Its assets were approximately 90 percent liquid. Its balance sheet at December 31, 1930, showed a surplus of $7,882,959.52. The evidence does not show that there were "reasonable needs" for any further accumulation of earnings. The accumulated earnings apparently were already greatly in excess of the reasonable needs of the business.
It is true of course that the security holdings of Almours Securities, Inc., were much larger than those of the petitioner in the instant case and consequently the annual income and the accumulated surplus in that case were much larger than in the instant case, but the differences are of degree only, we think. Considering things in proportion, we are unable to see any more substantial need for additional accumulated surplus in the instant case than there was in Petitioner had substantially no liabilities except to the holders of the units of its beneficial interest. It had no funded debt and its assets appear to have been, for the1940 BTA LEXIS 881">*911 most part, liquid.
Respondent, in discussing in his brief his contention that in the taxable years 1932 and 1933 petitioner permitted its earnings and profits to accumulate beyond the reasonable needs of its business, says, among other things:
From the date of organization in 1924 until the end of 1933, petitioner realized a total net income of almost $4,000,000.00, exclusive of the 100% dividend in preferred stock of the Western Cartridge Company received in 1926 and later set up on the books at a value of $1,472,400.00, while during the same period it paid dividends of only $1,220,000.00 and had an accumulated surplus at the end of 1933 of approximately $2,700,000.00, also exclusive of the preferred stock dividend referred to. The accumulated surplus at the beginning of the first taxable year, 1932, was $2,326,939.57, exclusive of the dividend in preferred stock. The earnings for 1932 were $270,833.01 and for 1933 were $210,682.05, from which a dividend of $100,000.00 was paid in 1932 and none in 1933, although a dividend of $150,000.00 was paid in the early part of 1934.
This is not a case where large earnings were realized and no dividends were declared, but with an accumulation1940 BTA LEXIS 881">*912 of earnings of more than $2,300,000.00 as shown by the books and of $3,772,800.00, including the dividend in preferred stock * * * the further accumulation during 1932 and 1933 of any amount was unnecessary and beyond the reasonable needs of the business in those years. * * *
As we have already indicated, we agree with this contention. Even though there had been a very substantial shrinkage in the market value 42 B.T.A. 1203">*1216 of some of the securities owned by petitioner, we are not convinced that there was any reasonable need in petitioner's business for the accumulation of additional earned surplus. Petitioner lays much stress on the fact that it was financial backer and aid to the Equitable Powder Manufacturing Co. and the Western Cartridge Co., the controlling stock of which constituted its most valuable holdings, and contends that it was but natural and reasonable that it should continue to add to its surplus funds during the taxable years, especially in view of the fact that there was much uncertainty in business during those years, due to the depression.
This argument, we think, would be much more persuasive if Equitable and Cartridge had been weak and struggling corporations. 1940 BTA LEXIS 881">*913 Both, however, were strong companies, with long records of success behind them, and there is no evidence that either was in any financial distress. True it is that in 1931, when Cartridge acquired the Winchester Repeating Arms Co. it was unable to borrow from the banks all the cash which it needed in the transaction on account of the 10 percent loan limit which applied to banks, and petitioner gave its aid by borrowing $1,000,000 and turning it over to Cartridge to use in the transaction, but early in 1932 Cartridge repaid this amount by borrowing some funds from the National City Bank of New York City.
Congress has said, in section 104(b) of the Revenue Act of 1932, that the fact that any corporation permits its gains or profits to accumulate beyond the reasonable needs of the business shall be prima facie evidence of a purpose to escape the surtax. The additional tax which Congress has imposed under the provisions of section 104 is a severe one, but Congress in the same section of the act provided a way by which the severe penalty might be avoided by those corporations which fall within its provisions. Subsection (d) of section 104 provides:
(d) The tax imposed by this section1940 BTA LEXIS 881">*914 shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire distributive shares, whether distributed or not, of the net income of the corporation for such year. * * *
In the instant case, if F. W. Olin, John M. Olin, Spencer T. Olin, and Mary M. Olin, who owned all the units of beneficial interest in the Olin Security Co., had included in their individual income tax returns for the respective taxable years their distributive shares of the net income of the Olin Security Co., whether distributed or not, the 50 percent additional tax imposed by section 104 would have been avoided. This they did not do. But be that as it may, it is not our function to discuss and decide the wisdom or unwisdom of an act of Congress. It is our duty to apply the law as we find it.
42 B.T.A. 1203">*1217 In the instant case we are unable to see where, during the taxable years, there was any reasonable need for petitioner, primarily a holding and investment company, to add further to its already large accumulated surplus. Cf. 1940 BTA LEXIS 881">*915 We have, therefore, found that in both taxable years petitioner permitted its gains and profits to accumulate beyond the reasonable needs of its business. The existence of these facts raises the statutory presumption that petitioner was availed of in 1932 and 1933 for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed. We do not think the evidence is sufficient to overcome this presumption. We, therefore, decide in favor of the Commissioner on the only issue which is presented for our decision.
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 104. ACCUMULATION OF SURPLUS TO EVADE SURTAXES. ↩
2. The phrase "the surtax" was stricken out by the National Industrial Recovery Act of June 16, 1933, and the phrase "any internal revenue tax" substituted therefor. The amendment is, however, without significance in this case and will not be discussed further. ↩