L. W. Tilden, Inc. v. Commissioner of Internal Revenue, 192 F.2d 704 (5th Cir. 1951)

These are petitions to review Tax Court decisions in Causes Nos. 3455 and 20082, determining deficiencies in income tax, declared value excess profits, and excess profits, taxes for the fiscal years ended September 30, 1941, through 1944, and assessing a penalty. By order of the court they have been consolidated for the purpose of the record and their submission here.

Taxpayer's petition to revew the adverse decision of Judge Leech in Cause No. 3455 presents the single question: Whether, though the properties conveyed by each transferor were different and of different value, the transaction, in which in 1936, L. W. Tilden, his wife, and eight children, acting together, transferred to taxpayer the citrus groves and farm land constituting the enterprise known as the Tilden Properties, in return for which each grantor received one-tenth of the stock of taxpayer, satisfied the requirements of Sec. 112(b) (5) of Revenue Act of 1936, 26 U.S.C.A. that the amount of stock received by each transferor must be "substantially in proportion to his interest in the property prior to the exchange", and was therefore a nontaxable exchange so that the cost to the taxpayer of said property for depreciation, etc. was the cost thereof to the transferors.

While one hundred pages of the printed record are taken up with the statement of the evidence on this issue, and the findings of fact and opinion¹  take twenty-three more, the controlling, the ultimate, facts²  are not in dispute and are such, we think, as to leave in no doubt that the answer to the question must be in the affirmative.

Because this is so, and because we are in complete agreement with the decision of the Tax Court on this issue, not only as to the result, but as to the reasons it gives, we shall say so without more except to say that the taxpayer's contention to the contrary is in law a sticking in the bark, an exaltation of form over substance, and, in fact, a denial of the effect of the plain and undisputed facts.

Taxpayer's petition for review of the adverse decision of Judge Johnson, in Cause No. 20082, presents two questions. The first and principal question is whether the Tax Court erred in approving the commissioner's determination that the net income of the Tilden joint venture for the fiscal years ended September 30, 1943, and September 30, 1944, was taxable to the petitioner. The second and subordinate question is whether, if this determination was correct, it erred in approving the commissioner's assessment of penalty.

The memorandum containing the findings of fact, which, in great detail and through twenty-five printed pages, sets out the undisputed facts and the opinion of the Tax Court, is not officially reported. Because it is not, because the facts came in without dispute, and because the determination of the judge turned on the legal effect of the facts, it will be necessary for us to state the controlling facts as they are set down in the judge's findings.³ 

When it comes to his conclusions, we find ourselves in complete agreement with his statement that: "The burden of proving that the stockholders of petitioner entered into the lease-joint venture arrangement with the intention of joining together for the purpose of carrying on the citrus-grove business as a joint venture and sharing in its profits and losses was on the petitioner."

We are, however, in complete disagreement with, and find clearly erroneous, his conclusion that they did not carry that burden, and, therefore, in complete disagreement with his conclusion, stated as a finding of fact, that: "The persons listed in the joint venture agreement did not really and truly intend to join together during the taxable years for the purpose of engaging in the business of operating the Tilden citrus groves as a joint venture for profit."

We are in complete agreement with the statement in the opinion: "Looking at the language of the joint venture agreement alone, its purpose was to create a separate and independent enterprise to operate the citrus groves for a period of five years as a joint venture and its profits were to be distributed to its members. If this language expressed the true intent of the parties, the joint venture was to be operated for the benefit of its members and not for the benefit of petitioner."

We are in disagreement with, and find clearly erroneous, the conclusion, "However, the conduct of the parties in executing its provisions convinces their intention was otherwise."

We are in agreement with the statement: "This and other Courts have repeatedly given recognition to the principle that a taxpayer has the right to reduce its taxes by any legal means and is not required to operate a business in the form most advantageous to the government tax-wise. It follows that the petitioner and its stockholders had the right to change the manner of operating its groves. But any change must have a business and not merely a tax-saving purpose, and the fact that a family-owned corporation and members of the family which own its stock are involved in the change requires that it be subjected to careful scrutiny to determine whether it is in fact what it appears to be in form."

We agree, too, with the statement: "Of course, if it appeared from the evidence that there was some likelihood that petitioner would lose its property and that the lease-joint venture arrangement provided for the receipt by petitioner of a greater income, after taxes, than it would have received if the lease had not been made, the reason given would have substance."

We are, however, in disagreement with, and find clearly erroneous, the view there expressed that since the only amount to be received by the petitioner was the rental and, under the terms of the joint venture agreement all profits after expenses were to be distributed to its members, the arrangement could not have had the effect of providing for the receipt by petitioner of a greater income after taxes than it would have had if the arrangement had not been made. We think this completely disregards the facts as to the Tilden venture and the dominant purpose which has sustained the Tildens from the beginning, to free the properties from debt and save them for the family.

Finally, we are in agreement with the statement: "After a careful consideration of all of the evidence submitted in this proceeding, we are convinced that the sole purpose of the members of the Tilden family and stockholders of petitioner in creating the lease-joint venture arrangement was to avoid the payment of excess profits taxes by petitioner and apply the tax savings thus realized to the payment of its mortgage indebtedness."

We are in complete disagreement with, and find clearly erroneous, the conclusion that what the parties did to realize this result was not a reality but a sham. We are of the clear opinion, in short that everything which was done by the Tildens in connection with the forming of the first and second joint ventures and the discharging of the debts, was in complete accord with, and carried out, the prime and unceasing purpose and intention which had dominated the Tilden operations from the beginning, to discharge the heavy indebtedness which had accumulated against the Tilden properties and to save them for their real owners, the members of the Tilden family.

From this point of view every action, which this long record shows the Tildens have taken since Tilden, Sr. first began his long uphill fight to save the properties, is seen in its true meaning, derives its true force. The actions, particularly Tilden's deeding the properties to his wife and children to borrow money, and then causing the corporation to be formed and the properties to be deeded to it, which give rise, and furnish the answer, to the first question, whether when the corporation was formed a new base was acquired, all were taken with this end in view.

In the same way, the things done which give rise, and furnish the answer, to the second question must all be related to, and looked at from, this point of view. So viewed, we think it clear beyond question that it must be found and held: that, when it became clear to the Tildens that to continue to operate the properties under the corporate form into which they had been temporarily cast, in order to pay the debts and save them for their owners, would defeat the very purpose behind the assumption of this form, and they formed the venture, their actions in doing so had substance. Indeed, we think they were of the very essence of the general, the underlying, purpose which had animated the Tildens from the beginning of their troubles.

In this view, to say of these arrangements that they were not of the substance, but mere shadow, is to deny what was done, to turn reality into illusion. Indeed, it is a complete denial of the realities, a stubborn refusal to face the facts which show without dispute: that, since the formation of the first venture, the corporation has not operated the properties, but they have been operated either by the first or second joint venture; that under these arrangements taxes have been returned and paid for years, the mortgages have been paid off, and the property has been saved.

In the family partnership cases, of which we have written many, one of the most recent being Batman v. Commissioner, 5 Cir., 189 F.2d 107, supporting the point by reference to, and discussion of, authorities, we have carefully pointed out that family arrangements which have substance are just as effective as those made by persons not members of the family. We have pointed out, too, that what is condemned in these arrangements is not the fact that they were made by families, but that there was the creation of a partnership form without any legal and effective change in the way and manner in which the business had been carried on.

Here there was a complete change, the return of the operations to the family form which had been departed from only to satisfy their creditors. The stockholders here actually took over the operation of the property, and it was never returned to the corporation. They received large profits from those operations, they have paid large taxes thereon, and when, with the moneys received, they had bought up the mortgages and later decided to dissolve their venture, they did not return the operation to the corporation. They formed a new venture arrangement and the corporation continues to exist only because of the pendency of this tax claim.

We think it is the commissioner, not the taxpayer, who puts form above substance when he insists that these transactions fail simply because the Tildens took the course they did to, and they did, save large taxes and with these savings were able to protect the property from the mortgages.

Our case, Armston & Co. v. Commissioner, 5 Cir., 188 F.2d 531, is not at all in point. The principles there decided are the same principles earlier discussed and given effect to by this court in Commissioner v. Greenspun, 5 Cir., 156 F.2d 917. Those cases merely refused to give effect to a form. They did not hold under facts comparable to these that substance would be denied to a transaction merely because it affected a large tax saving.

A case in point, though on facts not as strong for the taxpayer as here is Twin Oaks Co. v. Commissioner, 9 Cir., 183 F.2d 385. There, as here, a single judge Tax Court, the same judge sitting as sat here, denied substance to a real transaction, and the court reversed.

In view of our conclusion, that the decision of the Tax Court on the second question was wrong, it becomes unnecessary to determine the third question, whether, as found by the Tax Court, taxpayer was subject to a penalty.

The judgment in Cause No. 3455 is affirmed; in Cause No. 20082, it is reversed.