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Home > Journals > Michigan Law Review > MLR > Volume 37 > Issue 2 (1938)

 

Abstract

Section 104 of the Revenue Act of 1928 imposed a surtax on the net income of any corporation "formed or availed of for the purpose of preventing the imposition of the surtax on its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided and distributed," and provided that "the fact 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." Defendant corporation was formed in 1911 with $200,000 capital stock all owned by Kohl. In 1931 the net profits of the corporation were more than $682,000 and it had a surplus of nearly $8,000,000. Its excess of cash on hand over accounts payable was $1,136,820. It had declared no dividends since 1919 when the high personal surtaxes went into effect. If it had declared dividends of profits in each of those years the additional surtax paid by Kohl would have been $1,240,852 and if it had declared all of its 1931 profits in dividends Kohl's additional surtax for the year would have been more than $115,000. During the past seven years Kohl had borrowed $610,000 from the corporation. Held, the corporation was liable for the surtax imposed by section 104. The tax is constitutional, and is applicable to a legitimate business corporation availed of for the forbidden purpose. There was ample evidence that the surplus accumulated was in excess of the reasonable needs of the business; and, even without the aid of the presumption, there was sufficient evidence to show that the corporation was availed of to withhold dividends to defeat the surtax on the stockholder. Helvering v. National Grocery Co., 304 U. S. 282, 58 S. Ct. 932 (1938), rehearing denied 59 S. Ct. 56.

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