United States v. Donruss Company

PETITIONER: United States
RESPONDENT: Donruss Company
LOCATION: Surface Transportation Board at the United States Department of Transportation

DOCKET NO.: 17
DECIDED BY: Warren Court (1967-1969)
LOWER COURT: United States Court of Appeals for the Sixth Circuit

CITATION: 393 US 297 (1969)
ARGUED: Oct 22, 1968 / Oct 23, 1968
DECIDED: Jan 13, 1969

Facts of the case

Question

Media for United States v. Donruss Company

Audio Transcription for Oral Argument - October 23, 1968 in United States v. Donruss Company

Audio Transcription for Oral Argument - October 22, 1968 in United States v. Donruss Company

Earl Warren:

Number 17, the United States, petitioner versus the Donruss Company.

Mr. Rogovin.

Mitchell Rogovin:

Mr. Chief Justice and may it please the Court.

This is an income tax case dealing with the construction or portion of the accumulated earnings tax.

The purpose of this tax, the accumulated earnings tax, which has been a part of our tax fabrics since 1913, is to deter shareholders of a corporation from avoiding individual income tax by having the corporation accumulate earnings beyond the reasonable needs of the corporation.

The Government's petition for a writ of certiorari to review the judgment of the Sixth Circuit in this case takes place because the Sixth Circuit's decision was in conflict with four other circuits, circuits that are in support of the United States in its construction.

The surplus earnings tax deals with Sections 531 through 537 of the Internal Revenue Code and they have three essential features.

Section 532 (a) of the Code has the critical operative provision in the context of the accumulated earnings tax.

This is the provision that imposes the special tax on “every corporation formed or availed of for the purpose of avoiding the income tax with respect to its shareholders by permitting earnings and profits to accumulate instead of being divided or distributed.”

This feature requires a particular showing of conduct and a particular showing of a state of mind.

Questions of intent and state of mind however are difficult and since 1913, the statute has carried with it a rebuttable presumption regarding the prohibited purpose.

Section 533 (a) of the Code carries the prohibited -- carries this presumption.

It provides that the fact that earnings and profits are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the income tax with respect to shareholders unless the corporation by the preponderance of the evidence shall prove to the contrary.

Finally, since 1954, there has been a credit provision within the accumulated earnings tax and this is found at 535 (c), the most significant of the two credits, the 535 (c) (1) credit which in essence permits a credit notwithstanding the presence of this proscribed purpose.

As to that portion of the accumulated earnings that if determined by the trier of fact to be reasonable, although the ultimate issue is whether or not there's a proscribed purpose, whether or not it exists, even if it's found to exist, the credit under 535 (c) (1) would wash out the tax at least as to that portion of the accumulation --

Byron R. White:

Is this true Mr. Rogovin even though you're not relying on the presumption?

Let's assume there's some expressed approval of what the purpose was.

Mitchell Rogovin:

Yes, sir.

Byron R. White:

And that is was to avoid income taxes.

Mitchell Rogovin:

Yes, sir.

Byron R. White:

Then as long as the accumulation is reasonable, there's no penalty imposed.

Mitchell Rogovin:

Yes, Mr. Justice White, what had happened prior to 1954 was that if there are any portion of the total accumulation were determined to be unreasonable, then the tax would apply to the totality of the accumulation.

The credit in 1954 allowed the taxpayer to at least take out of the ambit of a tax that portion which was determined to be reasonable at all times assuming that the avoidance purpose existed.

Byron R. White:

So this in effect that this law unreasonable (Inaudible)?

Mitchell Rogovin:

Pardon me sir.

Byron R. White:

This is just denounced to a law against unreasonable purpose in accumulation?

Mitchell Rogovin:

With the requisite of intent.

The intent is built into the statute, the central feature.

Byron R. White:

Suppose the intent still maintain -- still accumulate (Inaudible)?

Mitchell Rogovin:

As the net result of the '54 credit.