Ivan Allen Company v. United States – Oral Argument – April 16, 1975

Media for Ivan Allen Company v. United States

Audio Transcription for Opinion Announcement – June 26, 1975 in Ivan Allen Company v. United States
Audio Transcription for Oral Argument – April 15, 1975 in Ivan Allen Company v. United States

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Warren E. Burger:

We’ll resume the arguments in Ivan Allen Company against the United States.

Mr. Crampton, you have 18 minutes remaining.

Scott P. Crampton:

Mr. Chief Justice and may it please the Court.

I’d like to point out in continuing our argument that if the resources of this corporation had been entirely reflected in plant and equipment then there would obviously be no liability here for the unreasonable accumulation.

And I think counsel for the tax payer has agreed in his oral argument that the money that they invested in the Xerox stock is in fact extra money that the corporation really didn’t need other than perhaps the $100,000.00 of cost.

Warren E. Burger:

I suppose included in the first part of your statement would be land for example which is purchased for possible plant expansion if they could demonstrate a valid —

Scott P. Crampton:

That’s right.

Yes, I think anything if they can really firm it down that they plan to move the plant or expand it or do something like that they have a solid reasonably anticipated need that would qualify under the exemption.

Warren E. Burger:

But if it was land they bought for speculation for arise in the market then would it fall in the same category in your view is the Xerox stock?

Scott P. Crampton:

No, because it would not be a net liquid asset, it wouldn’t be readily realizable.

I think they do make a distinction.

You have to look at what your current situation is and if you had it tied up in long term investments like that I don’t believe any of the case to say that it would consider that.

Now, perhaps —

Warren E. Burger:

It turns on liquidity then?

Scott P. Crampton:

Yes.

I assume if they kept investing let’s say hundreds of thousand of dollars and land just to perhaps a thought of avoiding this when maybe the commissioner might step in.

But basically they have been looking at liquid assets.

Potter Stewart:

Neither the statute under regulation saying anything about liquid assets?

Scott P. Crampton:

No.

But I think the case law has pretty well developed that and that is the theory I think back of it is that if you have the money invested in such a way that you really can’t get your hands on it then nobody could criticize you for not paying the dividends that —

Potter Stewart:

And yet —

Scott P. Crampton:

— otherwise it would be due.

Potter Stewart:

If the holder — if the whole fulcrum of decision whether or not the assets would liquid, it seems to me that that would perhaps provide a bit many opportunities to violated the — both the letter and the spirit of Section 532 if corporations should go off and buy Rembrandt portraits and things like that.

That would be and certainly an incorporated pocketbook wouldn’t it?

Scott P. Crampton:

I think so and that was why I qualified my answer to the Chief Justice that I thought that this became obvious.

The commissioner might very well move in.

You shouldn’t just let them as you say by portraits or by land that they don’t anticipate ever using at all.

But I think as a–

Potter Stewart:

Maybe, is there any decision of this Court that says that the test is whether the assets are liquid or easily convertible into cash?

Scott P. Crampton:

The National —

Audio Transcription for Oral Argument – April 15, 1975 in Ivan Allen Company v. United States

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Potter Stewart:

Nothing in either of the statute of regulations that say a word about that.

Scott P. Crampton:

You’re right but the National Grocery Company case that we mentioned earlier focused on the liquidity of the asset pointing out that the securities that were really liquid had dropped the value to $2 million and —

Potter Stewart:

And realized depreciation —

Scott P. Crampton:

Yes.

Potter Stewart:

— and that the Court in that case said that was a factor to be taken into consideration.

Isn’t that — that’s about all it said, isn’t it?

Scott P. Crampton:

That’s about right, yes.

William O. Douglas:

But in any event in this case the assets are liquid?

Scott P. Crampton:

That’s been stipulated and they are — everybody knows Xerox stock is liquid and that is the principle asset that they had here.

William H. Rehnquist:

Well, how about the old French saying that everything has its price.

You know, you can take something that doesn’t have a — isn’t traded on a market and yet presumably if you wanted to sell it you can sell it and if somebody wants to buy it they can buy it.

It’s just a question of getting together on the price.

Scott P. Crampton:

I think that’s true but I think part of the answer to this problem of putting your securities or assets in long term investments are that probably the board of directors as a practical matter wouldn’t want to do that because most corporations closely held.

They probably want to have their assets where they can reach them or readily convert them if they need to.

William H. Rehnquist:

Unless, it’s an incorporative pocketbook?

Scott P. Crampton:

That’s right.

But even I think a lot of people incorporated pocketbooks may not want to put their money into land if they feel they couldn’t get it out for 15 or 20 years and anywhere near they put it in.

But I do coming back to this case, I think we have stipulated that question out of the case and stipulated that we do have liquid assets here and as I say we can.

This corporation could realize — could convert this of need to or borrow against that are utilize these assets to pay the dividends.

William H. Rehnquist:

Well, that’s fine if liquidity is an important aspect of the test?

Scott P. Crampton:

Well, I think it is and I think — I mean that’s what the cases of the lower courts that have considered this have held that time and time again.

Warren E. Burger:

It’s really limiting test isn’t it when you consider that in certain periods land — investment land could be a shelter that would be quite as liquid as Xerox stock with very high return certain areas of the country capital gains.

Scott P. Crampton:

Well, that is true but I don’t think that your land — your problems with land usually I would say it’s a practical matter much more complicated than they are with the securities on the New York Stock Exchange so up and even though you think you’ve got a great bargain in land you may have title problems or questions of state regulations zoning and things like that that complicates your life if you’re putting your assets in the land.

But you certainly don’t have those with listed securities.

Coming back to that National Grocery —

Warren E. Burger:

In other words if —

Scott P. Crampton:

Pardon me.

Warren E. Burger:

I would interrupt you again.

Are you really saying that the liquidity test is something like making the comparison of whether the asset is in about the same shape as it would be if it were sitting in the bank?

Scott P. Crampton:

Yes.

Audio Transcription for Oral Argument – April 15, 1975 in Ivan Allen Company v. United States

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Warren E. Burger:

In the bank, it would clearly be —

Scott P. Crampton:

Readily available.

Warren E. Burger:

— subject to this penalty?

Scott P. Crampton:

And it’s —

Warren E. Burger:

And you’re saying that any asset which has essentially the same kind of liquidity as money in the bank, it is then subject to penalty provision?

Scott P. Crampton:

It’s subject to being considered in determining whether or not the reasonable needs of the business can be met from the available resources.

Lewis F. Powell, Jr.:

Mr. Crampton?

Scott P. Crampton:

Mr. Powell.

Lewis F. Powell, Jr.:

Now, limiting to our discussion yesterday and having in mind that question by the Chief Justice as to stock being the equivalent in terms of liquidity with cash, what would you advise the corporation?

What would you have advised this corporation bearing in mind as I noted yesterday that Xerox stock varied according to one of the manuals from 35 to 134 last year?

What would you have advised this company at the beginning of the year on your theory of the law as to when to sell the stock or whether or to sell it?

And would you have advised the client that Xerox stock at a 134 was equivalent of cash when you dropped the 35 before the year was over?

Scott P. Crampton:

No, I would, in answer your question, I think I would have suggested that the corporation look at that movement of the Xerox stock during the year.

And if they had bought it, I forgot what the price was per share of it in your example supposing they had bought it five and it never got below 35 and they had this type of earnings and they had this volume of shares so that they had if you use the value of 35, there were maybe two or three times above their earnings I would certainly suggest that either they declare their earnings as a dividend or do so realizing that they would risk a tax under the penalty provision here the accumulated earnings tax.

Lewis F. Powell, Jr.:

You do that at the fiscal year?

Scott P. Crampton:

No, I think you look at that the end of the year.

You would see where the movement has been during the year and I think that your bottom would be the lowest thing would be the factor that you would really consider if you want to be safe.

Lewis F. Powell, Jr.:

So, on the last day of your fiscal year you take a look at the market value of the stock and I think you said yesterday you thought you could average it or take the low figure.

What would you do with your real estate that we talked about yesterday, would you get appraisals?

Scott P. Crampton:

No.

William O. Douglas:

This is at various times during the year?

Scott P. Crampton:

No, because I don’t think the case say you take in to consideration real estate unless an example you gave me you could establish that it was readily marketable.

But here again, I think you look at what the assets are available for — to pay the dividends.

Can you pay the dividends without disrupting a normal life of this corporation in the serious way?

And if you have liquid assets, the question is; why shouldn’t the dividends be paid?

I would like to — if I might just mention briefly the one statement from that National Grocery case that I think does state the position of this Court on the question.

It said depreciation and any of the assets is evidence to be considered in determining the issue of fact whether the accumulation of profits was an excess of the reasonable needs of the business.

And it’s near as I know that quoted statement has never been questioned or repudiated.

And if you do look at depreciation in the assets then it seems to us that the economic test applies when assets are going down that you’re certainly justified in looking at it when they go up.

The stipulation as we mentioned shows that this Xerox stock had a cost of $1,200.00 for the fiscal year 66 and it had a fair market values the party stipulated of almost $2.5 million so that that’s 20 or 25 times the original cost.

Audio Transcription for Oral Argument – April 15, 1975 in Ivan Allen Company v. United States

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Scott P. Crampton:

The margin here is such that this corporation could certainly have paid the dividend of $344,000.00 that year without any substantial loss of economic muscles as we view the situation.

I was asked yesterday —

Potter Stewart:

If it would’ve had, in order to do that it would’ve had needed to sell part of the stock or borrow against it wouldn’t it?

Scott P. Crampton:

It might have, yes.

Potter Stewart:

If we’re talking about liquidity, if we’re talking about —

Scott P. Crampton:

That’s right.

Potter Stewart:

— cash dividends.

Scott P. Crampton:

Well, —

Warren E. Burger:

I can use pay out dividends in time to could they not?

Scott P. Crampton:

Yes, they could but to pay out — if they paid out the Xerox stock it would come out at their cost and the tax payers would’ve picked it up market value —

Potter Stewart:

The market value.

Scott P. Crampton:

— and I think that that would’ve been — they wouldn’t do that as a practical matter.

I don’t think —

Potter Stewart:

Although they did do it in the previous year, do they not?

Scott P. Crampton:

Yes, just to a few shares.

Potter Stewart:

As to a few shares.

Scott P. Crampton:

870 I think.

I was asked yesterday about the considerations for accounting —

Potter Stewart:

Why would that be disadvantageous to do?

If the corporation paid it out any kind and under their regulation as its cost and at least would’ve been a realizable or taxable gain.

They would just to pay it out at cost and the shareholders would’ve received it at fair market value with fair market value as shareholders basis in the event of subsequent sale.

Why would that have been disadvantage economically?

Scott P. Crampton:

Well, I believe the corporations would’ve — had to pay a tax on to see the dividends at fair market value when they receive the shares.

Stockholders, pardon me, yes.

Potter Stewart:

At fair market?

Scott P. Crampton:

At fair market value.

Potter Stewart:

That’s ordinary income?

Scott P. Crampton:

Yes.

Potter Stewart:

Would that be true of cash too?

Scott P. Crampton:

That’s right.

Audio Transcription for Oral Argument – April 15, 1975 in Ivan Allen Company v. United States

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Scott P. Crampton:

But if they distributed the stock they’d be picking up — they get a $100,000.00 credit and pick up $2.5 million of ordinary income or as I don’t think that the — if the stockholders are using this corporation or concerned about it they would not probably want to pick up that kind of income in a one year.

Warren E. Burger:

What if they paid out a million dollars of Xerox stock to the stockholders as dividends to the stockholders of their own company they say fairly substantial amount in commissions, would they not?

Scott P. Crampton:

I think on a block that big the commission wouldn’t be maybe 1% or 2%.

We have stipulated here I think it’s 6% commission rate but that was being liberal.

Potter Stewart:

It’s unrealistically high, I think.

Scott P. Crampton:

Yes.

We thought and I think so and on a block of that thing.

If I could touch as briefly on this question of this securities exchange commission situation, it seems to us that any financial statements that might be submitted to the Security and Exchange Commission or for accounting purposes are usually designed to reflect a financial condition for a fixed period.

They do not usually look at external sources for supplemental information such as evaluations.

And the question here is whether the corporation is in a position to distribute these current earnings as dividends.

If the corporation contends that it has business needs then as we’ve mentioned we look at the available resources and this requires a measuring of assets during the period.

Their actual cost some years earlier is really we see — we believe irrelevant to this economic examination of the period in time.

And I think the correctness of this position is demonstrated by the fact that you use value if it is less than cost in determining total resources as this Court has done in the National Grocery case.

If the cost were in fact the test you might find a situation where the tax payer had assets on its books considerably higher than their existing value at the time and they really didn’t have them.

In summary, it seems to us that the statute requires a consideration of economic needs of the business if the corporation has net liquid assets substantial and excess of economic needs.

It should distribute its earnings or pay the tax.

It certainly should not be permitted to avoid the tax by simply investing funds in readily marketable security.

We believe that the decision of the Fifth Circuit was correct and should be affirmed.

Warren E. Burger:

Thank you Mr. Crampton.

Mr. McAlpin, you have three minutes left.

Do you have anything further?

Kirk M. McAlpin:

We won’t take it Your Honor.

Warren E. Burger:

You submit?

Kirk M. McAlpin:

Yes, sir.

We do.

Warren E. Burger:

Thank you gentlemen.

The case is submitted.